<PAGE>
Filed Pursuant
to 424(b)(1)
File No: 333-37847
1,600,000 TRUST PREFERRED SECURITIES
FIB CAPITAL TRUST
8 5/8% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $25 PER TRUST PREFERRED SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED, AS DESCRIBED HEREIN, BY
[LOGO] FIRST INTERSTATE BANCSYSTEM, INC.
------------
The 8 5/8% Cumulative Trust Preferred Securities (the "Trust Preferred
Securities") offered hereby represent undivided beneficial interests in the
assets of FIB Capital Trust, a statutory business trust created under the laws
of the State of Delaware ("FIB Capital"). First Interstate BancSystem, Inc., a
Montana corporation ("First Interstate" or the "Company"), will be the owner of
all of the beneficial interests represented by common securities of FIB Capital
(the "Common Securities" and, collectively with the Trust Preferred Securities,
the "Trust Securities"). FIB Capital exists for the sole purpose of issuing the
Trust Securities and investing the proceeds thereof in the 8 5/8% Junior
Subordinated Deferrable Interest Debentures (the "Junior Subordinated
Debentures") to be issued by First Interstate. The Junior Subordinated
Debentures will mature on December 1, 2027, which date may be shortened (such
date, as it may be shortened, the "Stated Maturity") to a date not earlier than
December 1, 2002 if certain conditions are met (including First Interstate
having received prior approval of the Board of Governors of the Federal Reserve
System (the "Federal Reserve") to do so if then required under applicable
capital guidelines or policies of the Federal Reserve).
(CONTINUED ON NEXT PAGE)
SEE "RISK FACTORS" COMMENCING ON PAGE 11 HEREIN FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
---------------------
THESE SECURITIES ARE NOT SAVINGS ACCOUNTS OR DEPOSITS AND ARE NOT INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, BY ANY OTHER
GOVERNMENTAL AGENCY, OR OTHERWISE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC COMMISSION(1) FIB CAPITAL(2)(3)
<S> <C> <C> <C>
Per Trust Preferred Security........................... $25.00 (2) $25.00
Total.................................................. $40,000,000 (2) $40,000,000
</TABLE>
(1) First Interstate and FIB Capital have agreed to indemnify the Underwriters
against certain liabilities, including liabilities under the Securities Act
of 1933, as amended (the "Securities Act"). See "Underwriting."
(2) In view of the fact that all of the proceeds of the sale of the Trust
Preferred Securities will be used to purchase the Junior Subordinated
Debentures, First Interstate has agreed to pay the Underwriters as
compensation for arranging the investment therein of such proceeds, $0.9375
per Trust Preferred Security, or $1,500,000 in the aggregate. See
"Underwriting."
(3) Before deducting offering expenses payable by First Interstate estimated at
$400,000.
------------------------
The Trust Preferred Securities are offered for sale by the Underwriters
named herein subject to prior sale and when, as and if delivered to and accepted
by the Underwriters. It is expected that the Trust Preferred Securities will be
ready for delivery in book-entry form only through the facilities of The
Depository Trust Company in New York, New York, on or about November 7, 1997,
against payment therefor in immediately available funds.
D.A. Davidson & Co.
THE DATE OF THIS PROSPECTUS IS NOVEMBER 3, 1997
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
The Trust Preferred Securities will have a preference under certain
circumstances with respect to cash distributions and amounts payable on
liquidation, redemption or otherwise over the Common Securities, which will be
held by First Interstate. See "Description of the Trust Preferred
Securities--Subordination of Common Securities of FIB Capital Held by First
Interstate."
Holders of the Trust Preferred Securities will be entitled to receive
preferential cumulative cash distributions accruing from the date of original
issuance and payable quarterly in arrears on the last day of March, June,
September and December of each year (subject to possible deferral as described
below), commencing December 31, 1997, at the annual rate of 8 5/8% of the
Liquidation Amount of $25 per Trust Preferred Security ("Distributions"). The
amount of each Distribution due with respect to the Trust Preferred Securities
will include amounts accrued to, but excluding, the date the Distribution
payment is due. First Interstate will have the right to defer payments of
interest on the Junior Subordinated Debentures at any time or from time to time
for a period not exceeding 20 consecutive quarters with respect to each deferral
period (each, an "Extension Period"), provided that no Extension Period may
extend beyond the Stated Maturity of the Junior Subordinated Debentures. Upon
the termination of any such Extension Period and the payment of all amounts then
due, First Interstate may elect to begin a new Extension Period subject to the
requirements set forth herein. If interest payments on the Junior Subordinated
Debentures are so deferred, Distributions on the Trust Preferred Securities will
also be deferred and First Interstate will not be permitted, subject to certain
exceptions described herein, to declare or pay any cash distributions with
respect to its capital stock or to make any payment with respect to its debt
securities that rank PARI PASSU with or junior to the Junior Subordinated
Debentures. During an Extension Period, interest on the Junior Subordinated
Debentures will continue to accrue (and the amount of Distributions to which
holders of the Trust Preferred Securities are entitled will accumulate) at the
rate of 8 5/8% per annum, compounded quarterly and holders of the Trust
Preferred Securities will be required to accrue income and will be required to
pay United States federal income tax on that income. See "Description of Junior
Subordinated Debentures--Option to Defer Interest Payment Period" and "Certain
Federal Income Tax Consequences--Interest Income and Original Issue Discount."
First Interstate has, through the Guarantee Agreement, the Trust Agreement,
the Junior Subordinated Debentures, the Indenture and the Expense Agreement
(each as defined herein), taken together, fully, irrevocably and unconditionally
guaranteed all of FIB Capital's obligations under the Trust Preferred
Securities. See "Relationship Among the Trust Preferred Securities, the Junior
Subordinated Debentures and the Guarantee--Full and Unconditional Guarantee."
Under the Guarantee, First Interstate guarantees the payment of Distributions by
FIB Capital and payments on liquidation of or redemption of the Trust Preferred
Securities (subordinate to the right to payment of Senior and Subordinated Debt
of First Interstate, as defined herein) to the extent of funds held by FIB
Capital. The Guarantee does not cover payment of Distributions when FIB Capital
does not have sufficient funds to pay such Distributions. See "Description of
Guarantee." If First Interstate does not make required payments on the Junior
Subordinated Debentures held by FIB Capital, FIB Capital will have insufficient
funds to pay Distributions on the Trust Preferred Securities. In such event, a
holder of the Trust Preferred Securities may institute a legal proceeding
directly against First Interstate pursuant to the terms of the Indenture to
enforce payment of such Distributions to such holder. See "Description of Junior
Subordinated Debentures--Enforcement of Certain Rights by Holders of the Trust
Preferred Securities." The obligations of First Interstate under the Guarantee
and the Junior Subordinated Debentures are subordinate and junior in right of
payment to all Senior and Subordinated Debt (as defined in "Description of
Junior Subordinated Debentures--Subordination") of First Interstate.
The Trust Preferred Securities are subject to mandatory redemption, in whole
or in part, upon repayment of the Junior Subordinated Debentures at the Stated
Maturity or their earlier redemption in each case at a redemption price equal to
the aggregate liquidation preference of the Trust Preferred
(CONTINUED ON NEXT PAGE)
2
<PAGE>
(CONTINUED FROM PREVIOUS PAGE)
Securities plus any accumulated and unpaid Distributions thereon to the date of
redemption. The Junior Subordinated Debentures are redeemable prior to maturity
at the option of First Interstate, subject to any required prior approval of the
Federal Reserve, (i) on or after, December 1, 2002, in whole at any time or in
part from time to time, or (ii) at any time, in whole (but not in part), upon
the occurrence and continuation of a Tax Event, an Investment Company Event or a
Capital Treatment Event (each as defined herein), in each case at a redemption
price equal to the accrued and unpaid interest on the Junior Subordinated
Debentures to the date fixed for redemption, plus 100% of the principal amount
thereof. See "Description of the Trust Preferred Securities--Redemption."
First Interstate will have the right at any time to dissolve FIB Capital
and, after satisfaction of liabilities to creditors of FIB Capital as required
by applicable law, cause a Like Amount (as defined herein) of the Junior
Subordinated Debentures to be distributed to the holders of Trust Preferred
Securities in liquidation of FIB Capital, subject to First Interstate having
received prior approval of the Federal Reserve if then required under applicable
capital guidelines or policies of the Federal Reserve. See "Description of the
Trust Preferred Securities--Liquidation Distribution upon Dissolution."
The Junior Subordinated Debentures are unsecured and subordinated to all
Senior and Subordinated Debt (as defined herein). As of June 30, 1997, First
Interstate had approximately $52.0 million aggregate principal amount of Senior
and Subordinated Debt outstanding. The terms of the Junior Subordinated
Debentures place no limitation on the amount of Senior and Subordinated Debt
that First Interstate can issue. See "Risk Factors--Ranking of First
Interstate's Obligations Under the Junior Subordinated Debentures and the
Guarantee" and "Description of Junior Subordinated Debentures--Subordination."
In the event of the dissolution of FIB Capital, after satisfaction of
liabilities to creditors of FIB Capital as required by applicable law, the
holders of Trust Preferred Securities will be entitled to receive a liquidation
amount of $25 per Trust Preferred Security ("Liquidation Amount"), plus
accumulated and unpaid Distributions thereon to the date of payment, which may
be in the form of a Distribution of such Like Amount of Junior Subordinated
Debentures, subject to certain exceptions. See "Description of the Trust
Preferred Securities--Liquidation Distribution Upon Dissolution."
The Company does not intend to list the Trust Preferred Securities on any
securities exchange or include them for quotation on The Nasdaq Stock Market.
Although the Underwriters have indicated an intention to make a market in the
Trust Preferred Securities, the Underwriters are not obligated to make a market
in the Trust Preferred Securities, and any market making may be discontinued at
any time at the sole discretion of such Underwriters. There can be no assurance
that a market will develop for the Trust Preferred Securities. See "Risk
Factors--Limited Trading Market; Market Prices" and "Underwriting."
The Trust Preferred Securities will be represented by one or more global
certificates registered in the name of The Depository Trust Company ("DTC") or
its nominee. Beneficial interests in the Trust Preferred Securities will be
shown on and transfers thereof will be effected only through, records maintained
by participants in DTC. Except as described herein, the Trust Preferred
Securities in certificate form will not be issued in exchange for global
certificates. See "Book-Entry Issuance."
AS USED HEREIN, (I) THE "INDENTURE" MEANS THE JUNIOR SUBORDINATED INDENTURE
DATED AS OF NOVEMBER 7, 1997, AS AMENDED, BETWEEN FIRST INTERSTATE AND
WILMINGTON TRUST COMPANY, AS TRUSTEE (THE "INDENTURE TRUSTEE"), UNDER WHICH THE
JUNIOR SUBORDINATED DEBENTURES WILL BE ISSUED; (II) THE "TRUST AGREEMENT" MEANS
THE AMENDED AND RESTATED TRUST AGREEMENT RELATING TO FIB CAPITAL AMONG FIRST
INTERSTATE, AS DEPOSITOR, WILMINGTON TRUST COMPANY, AS PROPERTY TRUSTEE (THE
"PROPERTY TRUSTEE"), WILMINGTON TRUST COMPANY, AS DELAWARE TRUSTEE (THE
"DELAWARE TRUSTEE"), THE ADMINISTRATIVE TRUSTEES NAMED THEREIN (COLLECTIVELY,
WITH THE PROPERTY TRUSTEE AND DELAWARE TRUSTEE, THE "ISSUER TRUSTEES" OR
INDIVIDUALLY, A "TRUSTEE") AND THE HOLDERS, FROM TIME TO TIME, OF THE TRUST
SECURITIES; (III) THE "GUARANTEE AGREEMENT" MEANS THE GUARANTEE AGREEMENT
RELATING TO THE GUARANTEE (AS DEFINED HEREIN) BETWEEN FIRST INTERSTATE AND
WILMINGTON TRUST COMPANY, AS GUARANTEE TRUSTEE; AND (IV) THE "EXPENSE AGREEMENT"
MEANS THE EXPENSE AGREEMENT BETWEEN FIRST INTERSTATE AND FIB CAPITAL.
3
<PAGE>
First Interstate BancSystem, Inc.
Banking Offices
[MAP of Montana and Wyoming depicting the banking offices in such states.]
The Company operates 31 banking offices in 23 communities throughout Montana
and Wyoming.
------------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE TRUST PREFERRED
SECURITIES OFFERED HEREBY. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE
PURCHASE OF SECURITIES TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF
PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
4
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND NOTES THERETO APPEARING
ELSEWHERE IN THIS PROSPECTUS. UNLESS THE CONTEXT CLEARLY SUGGESTS OTHERWISE,
REFERENCES TO "FIRST INTERSTATE" OR THE "COMPANY" INCLUDE FIRST INTERSTATE
BANCSYSTEM, INC. AND ITS SUBSIDIARIES. EXCEPT AS OTHERWISE INDICATED, THE
INFORMATION IN THIS PROSPECTUS REGARDING THE COMMON STOCK OF THE COMPANY GIVES
RETROACTIVE EFFECT TO A 4-FOR-1 STOCK SPLIT IN OCTOBER 1997. THIS PROSPECTUS
CONTAINS CERTAIN "FORWARD-LOOKING STATEMENTS" RELATING TO FUTURE EVENTS OR THE
FUTURE PERFORMANCE OF THE COMPANY. THESE STATEMENTS INVOLVE VARIOUS RISKS AND
UNCERTAINTIES. PROSPECTIVE INVESTORS ARE CAUTIONED THAT SUCH STATEMENTS ARE ONLY
PREDICTIONS AND THAT ACTUAL EVENTS OR RESULTS MAY DIFFER SIGNIFICANTLY FROM SUCH
PREDICTIONS. IN EVALUATING SUCH STATEMENTS, PROSPECTIVE INVESTORS SHOULD
SPECIFICALLY CONSIDER THE VARIOUS FACTORS IDENTIFIED IN THIS PROSPECTUS,
INCLUDING THE MATTERS SET FORTH UNDER THE CAPTION "RISK FACTORS," WHICH COULD
CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE INDICATED IN SUCH
FORWARD-LOOKING STATEMENTS.
THE COMPANY
First Interstate is a bank holding company headquartered in Billings,
Montana which operates 31 banking offices in 23 communities throughout Montana
and Wyoming through its banking subsidiaries. At June 30, 1997, the Company had
assets of $2.1 billion, deposits of $1.7 billion and total stockholders' equity
of $153.9 million, making it the largest independent banking organization
headquartered in Montana or Wyoming.
First Interstate has three bank subsidiaries: First Interstate Bank in
Montana ("FIB Montana"), First Interstate Bank in Wyoming ("FIB Wyoming") and
First Interstate Bank, fsb in Hamilton, Montana ("First Interstate, fsb")
(collectively, the "Banks" and individually a "Bank"). FIB Montana, a Montana
chartered bank organized in 1916, has 20 banking offices in 14 Montana
communities, including Billings, Bozeman, Colstrip, Cut Bank, Eureka, Evergreen,
Gardiner, Great Falls, Hardin, Kalispell, Livingston, Miles City, Missoula and
Whitefish. FIB Wyoming, a Wyoming chartered bank organized in 1893, has ten
banking offices in eight Wyoming communities, including Buffalo, Casper,
Gillette, Greybull, Lander, Laramie, Riverton and Sheridan. First Interstate,
fsb, a federally chartered savings bank, was opened as a de novo savings bank in
December 1996, and currently has one banking office in Hamilton, Montana.
The Company, through the Banks, delivers a comprehensive range of consumer
and commercial banking services to individual and business customers. These
services include personal and business checking and savings accounts, time
deposits, individual retirement accounts, cash management, trust services and
commercial, consumer, real estate, agricultural and other loans. Additionally,
the Company operates a substantial data processing division that performs data
processing services for the Banks and 35 non-affiliated financial institutions
in Montana, Wyoming and Idaho. The Company also supports over 540 ATM locations
in 12 states, principally Montana, Wyoming, Idaho, Colorado and North Dakota.
The banking industry is presently undergoing change with respect to
regulatory matters, consolidation, changing consumer needs and economic and
market conditions. The Company believes that it can best address this changing
environment through its corporate "Strategic Vision." Through the Strategic
Vision, the Company emphasizes providing its customers full service commercial
banking at the local level using a personalized service approach, while serving
and strengthening the communities in which the Banks are located through
community service activities. The Company grants significant autonomy and
flexibility to the Banks in delivering and pricing products at the local level
in response to market considerations and customer needs. This flexibility and
autonomy enables the Banks to remain competitive and enhances the relationships
between the Banks and the customers they serve. The Company also emphasizes
accountability, however, by establishing performance and incentive standards for
the Banks which are tied to net income at the individual branch level. The
Company believes that this combination of autonomy and accountability allows the
Banks to provide a high level of personalized service to customers while
remaining attentive to financial performance.
5
<PAGE>
The Company's growth strategy includes growing internally and expanding into
new and complementary markets when appropriate opportunities arise. The
Company's internal growth strategy is to attract and retain customers by
providing personalized "high touch" service, increasing its offering of products
and services and cross-selling existing products and services. The Company
believes its ability to offer a complete package of consumer and commercial
banking products and services enhances First Interstate's image as a "one-stop"
banking organization. The Company has also grown in recent years by selectively
acquiring banks in additional markets in Montana and Wyoming. Since September
1996, the Company has acquired Mountain Bank of Whitefish ("FIB Whitefish"),
consisting of two branch locations, and two banks, consisting of six Montana and
Wyoming branch locations, previously operated by First Interstate Bancorp (the
"FIB Banks"). The Company is pursuing regulatory approval to open several new
branch offices in Montana and Wyoming. The Company believes that it will
continue to expand its presence in the Montana and Wyoming markets.
The Company was incorporated in Montana in 1971. The Company maintains its
principal executive offices at 401 North 31st Street, Billings, Montana 59101
and its telephone number is (406) 255-5300.
FIB CAPITAL TRUST
FIB Capital is a statutory business trust created under Delaware law
pursuant to (i) the Trust Agreement and (ii) the filing of a Certificate of
Trust with the Delaware Secretary of State on October 1, 1997. FIB Capital's
business and affairs are conducted by the Property Trustee, the Delaware Trustee
and two individual Administrative Trustees who are officers of the Company. FIB
Capital exists for the exclusive purposes of (i) issuing and selling the Trust
Securities, (ii) using the proceeds from the sale of the Trust Securities to
acquire the Junior Subordinated Debentures issued by First Interstate and (iii)
engaging in only those other activities necessary, advisable or incidental
thereto (such as registering the transfer of the Trust Securities). Accordingly,
the Junior Subordinated Debentures will be the sole assets of FIB Capital and
payments by First Interstate under the Junior Subordinated Debentures and the
Expense Agreement will be the sole revenues of FIB Capital. All of the Common
Securities will be owned by First Interstate. The Common Securities will rank
PARI PASSU and payments will be made thereon pro rata, with the Trust Preferred
Securities, except that upon the occurrence and during the continuance of an
event of default under the Trust Agreement resulting from an event of default
under the Indenture, the rights of First Interstate as holder of the Common
Securities to payment in respect of Distributions and payments upon liquidation,
redemption or otherwise will be subordinated to the rights of the holders of the
Trust Preferred Securities. See "Description of the Trust Preferred
Securities--Subordination of Common Securities of FIB Capital Held by First
Interstate." First Interstate will acquire Common Securities in an aggregate
liquidation amount equal to 3.0% of the total capital of FIB Capital. FIB
Capital has a term of 31 years, but may dissolve earlier as provided in the
Trust Agreement.
FIB Capital's principal offices are located at 401 North 31st Street,
Billings, Montana 59101 and its telephone number is (406) 255-5300.
6
<PAGE>
THE OFFERING
<TABLE>
<S> <C>
Issuer of Trust Preferred
Securities...................... FIB Capital
Securities offered................ 1,600,000 Trust Preferred Securities. The Trust
Preferred Securities represent undivided beneficial
interests in FIB Capital's assets, which will consist
solely of the Junior Subordinated Debentures and
payments thereunder.
Distributions..................... The Distributions payable on each Trust Preferred
Security will be fixed at a rate per annum of 8 5/8% of
the Liquidation Amount of $25 per Trust Preferred
Security, will be cumulative, will accrue from the date
of issuance of the Trust Preferred Securities, and will
be payable quarterly in arrears on the last day of
March, June, September and December of each year,
commencing on December 31, 1997 (subject to possible
deferral as described below). The amount of each
Distribution due with respect to the Trust Preferred
Securities will include amounts accrued to, but
excluding, the date the Distribution payment is due. See
"Description of the Trust Preferred Securities--
Distributions."
Extension periods................. So long as no Debenture Event of Default (as defined
herein) has occurred and is continuing, First Interstate
will have the right, at any time, to defer payments of
interest on the Junior Subordinated Debentures by
extending the interest payment period thereon for an
Extension Period, provided that no Extension Period may
extend beyond the Stated Maturity of the Junior
Subordinated Debentures. If interest payments are so
deferred, Distributions on the Trust Preferred
Securities will also be deferred and First Interstate
will not be permitted, subject to certain exceptions
described herein, to declare or pay any cash
distributions with respect to First Interstate's capital
stock or debt securities that rank PARI PASSU with or
junior to the Junior Subordinated Debentures. During an
Extension Period, Distributions will continue to
accumulate with interest thereon compounded quarterly.
Because interest would continue to accrue and compound
on the Junior Subordinated Debentures, to the extent
permitted by applicable law, holders of the Trust
Preferred Securities will be required to accrue income
for United States federal income tax purposes. See
"Description of Junior Subordinated Debentures--Option
to Defer Interest Payment Period" and "Certain Federal
Income Tax Consequences--Interest Income and Original
Issue Discount."
Maturity.......................... The Junior Subordinated Debentures will mature on
December 1, 2027, which date may be shortened to a date
not earlier than December 1, 2002 if certain conditions
are met (including First Interstate having received
prior approval of the Federal Reserve to do so if then
required under applicable capital guidelines or policies
of the Federal Reserve).
Redemption........................ The Trust Preferred Securities are subject to mandatory
redemption upon repayment of the Junior Subordinated
</TABLE>
7
<PAGE>
<TABLE>
<S> <C>
Debentures at the Stated Maturity or their earlier
redemption in an amount equal to the amount of Junior
Subordinated Debentures maturing on or being redeemed at
a redemption price equal to the aggregate Liquidation
Amount of the Trust Preferred Securities plus
accumulated and unpaid Distributions thereon to the date
of redemption. Subject to Federal Reserve approval, if
then required under applicable capital guidelines or
policies of the Federal Reserve, the Junior Subordinated
Debentures are redeemable prior to maturity at the
option of First Interstate (i) on or after December 1,
2002 in whole at any time or in part from time to time,
or (ii) at any time, in whole (but not in part), upon
the occurrence and during the continuance of a Tax
Event, an Investment Company Event or a Capital
Treatment Event, in each case at a redemption price
equal to 100% of the principal amount of the Junior
Subordinated Debentures so redeemed, together with any
accrued but unpaid interest to the date fixed for
redemption. See "Description of the Trust Preferred
Securities-- Redemption" and "Description of Junior
Subordinated Debentures--Redemption."
Distribution of Junior
Subordinated Debentures......... First Interstate has the right at any time to dissolve
FIB Capital and, after satisfaction of liabilities to
creditors of FIB Capital as provided by applicable law,
cause the Junior Subordinated Debentures to be
distributed to holders of Trust Preferred Securities in
liquidation of FIB Capital, subject to First Interstate
having received prior approval of the Federal Reserve to
do so if then required under applicable capital
guidelines or policies of the Federal Reserve. See
"Description of the Trust Preferred
Securities--Distribution of Junior Subordinated
Debentures."
Guarantee......................... Taken together, First Interstate's obligations under
various documents described herein, including the
Guarantee Agreement, provide a full guarantee of
payments by FIB Capital of Distributions and other
amounts due on the Trust Preferred Securities. Under the
Guarantee Agreement, First Interstate guarantees the
payment of Distributions by FIB Capital and payments on
liquidation of or redemption of the Trust Preferred
Securities (subordinate to the right to payment of
Senior and Subordinated Debt) to the extent of funds
held by FIB Capital. If FIB Capital has insufficient
funds to pay Distributions on the Trust Preferred
Securities (i.e., if First Interstate has failed to make
required payments under the Junior Subordinated
Debentures), a holder of the Trust Preferred Securities
would have the right to institute a legal proceeding
directly against First Interstate to enforce payment of
such Distributions to such holder. See "Description of
Junior Subordinated Debentures-- Enforcement of Certain
Rights by Holders of Trust Preferred Securities,"
"Description of Junior Subordinated Debentures-- Events
of Default and Description of Guarantee."
</TABLE>
8
<PAGE>
<TABLE>
<S> <C>
Ranking........................... The Trust Preferred Securities will rank PARI PASSU, and
payments thereon will be made pro rata, with the Common
Securities of FIB Capital held by First Interstate,
except as described under "Description of Trust
Preferred Securities-- Subordination of Common
Securities of FIB Capital held by First Interstate." The
obligations of First Interstate under the Guarantee, the
Junior Subordinated Debentures and other documents
described herein are unsecured and rank subordinate and
junior in right of payment to all current and future
Senior and Subordinated Debt, the amount of which is
unlimited. At June 30, 1997, the aggregate outstanding
Senior and Subordinated Debt of First Interstate was
approximately $52.0 million. In addition, because First
Interstate is a holding company, all obligations of
First Interstate relating to the securities described
herein will be effectively subordinated to all existing
and future liabilities of the Banks. First Interstate
may cause additional trust preferred securities to be
issued by trusts similar to FIB Capital in the future,
and there is no limit on the amount of such securities
that may be issued. In this event, First Interstate's
obligations under the Junior Subordinated Debentures to
be issued to such other trusts and First Interstate's
guarantees of the payments by such trusts will rank PARI
PASSU with First Interstate's obligations under the
Junior Subordinated Debentures and the Guarantee,
respectively.
Voting rights..................... The holders of Trust Preferred Securities will generally
have limited voting rights relating only to the
modification of the Trust Preferred Securities, the
dissolution, winding-up or liquidation of FIB Capital
and certain other matters described herein. See
"Description of Trust Preferred Securities--Voting
Rights; Amendment of the Trust Agreement."
Use of proceeds................... All of the proceeds from the sale of Trust Preferred
Securities will be invested by FIB Capital in the Junior
Subordinated Debentures. First Interstate intends to use
$20.0 million of the proceeds to redeem the outstanding
shares of the Company's noncumulative perpetual
preferred stock, subject to regulatory approval. The
Company intends to use the remaining proceeds to reduce
indebtedness outstanding under the Company's revolving
term loan. First Interstate expects the Trust Preferred
Securities to qualify as Tier 1 capital under the
capital guidelines of the Federal Reserve. See "Use of
Proceeds."
</TABLE>
RISK FACTORS
Prospective investors should carefully consider, among other things, the
discussion of various factors under the heading "Risk Factors" beginning on page
11 hereof.
9
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following summary consolidated financial data has been derived from the
audited and unaudited consolidated financial statements of the Company. See
"Selected Consolidated Financial Data."
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income....................... $ 80,330 $ 52,854 $ 117,925 $ 98,970 $ 80,230 $ 77,154 $ 78,707
Interest expense...................... 34,373 22,551 50,019 41,946 28,451 27,078 31,989
--------- --------- --------- --------- --------- --------- ---------
Net interest income................... 45,957 30,303 67,906 57,024 51,779 50,076 46,718
Provision for loan losses............. 2,281 1,152 3,844 1,629 1,344 1,345 1,630
--------- --------- --------- --------- --------- --------- ---------
Net interest income after provision
for loan losses..................... 43,676 29,151 64,062 55,395 50,435 48,731 45,088
Other operating income................ 13,485 10,740 23,927 18,764 16,387 15,724 14,936
Other operating expenses.............. 35,987 23,207 53,395 45,978 41,227 39,686 37,985
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes............ 21,174 16,684 34,594 28,181 25,595 24,769 22,039
Provision for income taxes............ 8,080 6,414 13,351 10,844 9,861 9,321 8,179
--------- --------- --------- --------- --------- --------- ---------
Net income............................ $ 13,094 $ 10,270 $ 21,243 $ 17,337 $ 15,734 $ 15,448 $ 13,860
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income applicable to common
stock............................... $ 12,247 $ 10,270 $ 20,818 $ 17,337 $ 15,734 $ 15,448 $ 13,860
Net income per common share........... $ 1.54 $ 1.31 $ 2.64 $ 2.21 $ 2.00 $ 1.96 $ 1.74
Dividends per common share............ $ 0.46 $ 0.38 $ 0.77 $ 0.48 $ 0.40 $ 0.34 $ 0.28
Weighted average common shares
outstanding......................... 7,936,708 7,802,892 7,881,024 7,843,644 7,850,188 7,891,160 7,984,244
BALANCE SHEET DATA (AT PERIOD END):
Total assets.......................... $2,131,351 $1,350,478 $2,063,837 $1,351,215 $1,134,105 $1,097,469 $1,022,392
Loans................................. 1,475,852 940,248 1,375,479 870,378 751,518 667,385 607,125
Allowance for loan losses............. 28,757 15,406 27,797 15,171 13,726 13,373 12,965
Investment securities................. 396,931 247,317 403,571 258,737 251,745 249,754 226,821
Deposits.............................. 1,673,035 1,082,487 1,679,424 1,099,069 939,857 936,793 900,465
Long-term debt........................ 56,184 10,234 64,667 15,867 5,449 6,853 5,254
Stockholders' equity.................. 153,925 115,547 146,061 109,366 95,272 84,163 71,852
OPERATING RATIOS:
Return on average assets.............. 1.27% 1.55% 1.41% 1.39% 1.44% 1.50% 1.43%
Return on average common stockholders'
equity.............................. 18.94% 18.30% 17.84% 16.98% 17.64% 19.97% 20.43%
Net interest margin................... 5.11% 5.19% 5.15% 5.19% 5.34% 5.51% 5.45%
Net interest spread................... 4.46% 4.52% 4.47% 4.45% 4.76% 4.98% 4.87%
Ratio of earnings to fixed charges
(1):
Excluding interest on deposits...... 4.85x 14.50x 8.74x 9.50x 12.34x 30.66x 20.25x
Including interest on deposits...... 1.59x 1.73x 1.68x 1.66x 1.87x 1.91x 1.69x
ASSET QUALITY RATIOS:
Non-performing assets to total loans
and OREO (2)........................ 0.95% 0.99% 1.20% 0.97% 0.94% 1.44% 2.84%
Allowance for loan losses to total
loans............................... 1.95% 1.64% 2.02% 1.74% 1.83% 2.00% 2.14%
Allowance for loan losses to
non-performing loans (3)............ 223.42% 191.19% 185.10% 213.74% 259.62% 205.49% 104.09%
Net charge-offs to average loans...... 0.09% 0.10% 0.17% 0.13% 0.14% 0.15% 0.15%
REGULATORY CAPITAL RATIOS:
Tier 1 capital to risk-weighted
assets.............................. 7.68% 10.48% 7.35% 10.40% 11.32% 10.96% 9.55%
Total capital to risk-weighted
assets.............................. 10.21% 11.73% 9.98% 11.65% 12.58% 12.22% 11.05%
Leverage ratio........................ 5.72% 7.89% 5.28% 7.28% 8.12% 7.28% 6.60%
</TABLE>
- ------------------------------
(1) For purposes of computing the ratio of earnings to fixed charges, earnings
represents income before income taxes and fixed charges. Fixed charges
represent interest expense and preferred stock dividends, which dividends
commenced in October 1996. Deposits include interest-bearing deposits and
repurchase agreements. Without including preferred stock dividends in fixed
charges and excluding interest on deposits, the ratio of earnings to fixed
charges for the six months ended June 30, 1997 and the year ended December
31, 1996 were 5.89x and 9.91x, respectively. Without including preferred
stock dividends in fixed charges and including interest on deposits, the
ratio of earnings to fixed charges for the six months ended June 30, 1997
and the year ended December 31, 1996 were 1.61x and 1.68x, respectively.
(2) For purposes of computing the ratio of non-performing assets to total loans
and other real estate owned ("OREO"), non-performing assets include
non-accrual loans, loans past due 90 days or more and still accruing,
restructured debt and other real estate owned.
(3) For purposes of computing the ratio of allowance for loan losses to
non-performing loans, non-performing loans include non-accrual loans, loans
past due 90 days or more and still accruing and restructured debt.
10
<PAGE>
RISK FACTORS
PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER, AMONG OTHER THINGS, THE
FOLLOWING FACTORS IN CONNECTION WITH A DECISION TO PURCHASE THE TRUST PREFERRED
SECURITIES.
RANKING OF FIRST INTERSTATE'S OBLIGATIONS UNDER THE JUNIOR SUBORDINATED
DEBENTURES AND THE GUARANTEE
All obligations of First Interstate under the Guarantee, the Junior
Subordinated Debentures and other documents described herein are unsecured and
rank subordinate and junior in right of payment to all current and future Senior
and Subordinated Debt (as defined herein), the amount of which is unlimited. At
June 30, 1997, the aggregate outstanding Senior and Subordinated Debt was
approximately $52.0 million. In addition, because First Interstate is a holding
company, all obligations of First Interstate relating to the securities
described herein will be effectively subordinated to all existing and future
liabilities of the Company's subsidiaries, including the Banks. As a holding
company, the right of First Interstate to participate in any distribution of
assets of any subsidiary upon such subsidiary's liquidation or reorganization or
otherwise (and thus the ability of holders of Trust Preferred Securities to
benefit indirectly from such distribution) is subject to the prior claims of
creditors of that subsidiary, except to the extent that First Interstate may
itself be recognized as a creditor of that subsidiary. Accordingly, the Junior
Subordinated Debentures and all obligations of First Interstate relating to the
Trust Preferred Securities will be effectively subordinated to all existing and
future liabilities of the Banks and holders of the Trust Preferred Securities
should look only to the assets of First Interstate, and not the Banks, for
principal and interest payments on the Junior Subordinated Debentures. None of
the Indenture, the Guarantee Agreement or the Trust Agreement places any
limitation on the amount of secured or unsecured debt, including Senior and
Subordinated Debt, that may be incurred by First Interstate or the Banks.
Further, there is no limitation on First Interstate's ability to issue
additional debentures of like tenor with the Junior Subordinated Debentures in
connection with any further offerings of cumulative trust preferred securities
and such additional debentures would rank PARI PASSU with the Junior
Subordinated Debentures. See "Description of Junior Subordinated
Debentures--Subordination" and "Description of Guarantee-- Status of the
Guarantee."
DEPENDENCE ON DIVIDENDS AND INTEREST PAYMENTS FROM THE BANKS
The ability of FIB Capital to pay amounts due on the Trust Preferred
Securities is solely dependent upon First Interstate making payments on the
Junior Subordinated Debentures as and when required. As a holding company
without significant assets other than its equity interest in the Banks, First
Interstate's ability to pay interest on the Junior Subordinated Debentures to
FIB Capital (and consequently FIB Capital's ability to pay Distributions on the
Trust Preferred Securities and First Interstate's ability to pay its obligations
under the Guarantee) depends in large part upon the cash dividends First
Interstate receives from the Banks. Dividend payments from the Banks are subject
to regulatory limitations, generally based on current and retained earnings,
imposed by the various regulatory agencies with authority over the respective
Banks. Payment of dividends is also subject to regulatory restrictions if such
dividends would impair the capital of the Banks. Payment of dividends by the
Banks is also subject to each respective Bank's profitability, financial
condition and capital expenditures and other cash flow requirements. No
assurance can be given that the Banks will be able to pay dividends at past
levels, or at all, in the future. See "Regulation and Supervision."
OPTION TO DEFER INTEREST PAYMENT PERIOD; TAX CONSEQUENCES OF A DEFERRAL OF
INTEREST PAYMENTS
So long as no Debenture Event of Default has occurred and is continuing,
First Interstate has the right under the Indenture to defer payment of interest
on the Junior Subordinated Debentures at any time or from time to time for an
Extension Period, provided that no Extension Period may extend beyond the Stated
Maturity of the Junior Subordinated Debentures. As a consequence of any such
deferral, quarterly
11
<PAGE>
Distributions on the Trust Preferred Securities by FIB Capital will be deferred
(and the amount of Distributions to which holders of the Trust Preferred
Securities are entitled will accumulate additional amounts thereon at the rate
of 8 5/8% per annum, compounded quarterly, from the relevant payment date for
such Distributions, to the extent permitted by applicable law) during any such
Extension Period. During any such Extension Period, First Interstate will be
prohibited from making certain payments or distributions with respect to First
Interstate's capital stock (including dividends on or redemptions of common or
preferred stock) and from making certain payments with respect to any debt
securities of First Interstate that rank PARI PASSU with or junior in interest
to the Junior Subordinated Debentures. However, First Interstate will not be
restricted from (i) paying dividends or distributions in common stock of First
Interstate, (ii) redeeming rights or taking certain other actions under a
stockholders' rights plan, (iii) making payments under the Guarantee, or (iv)
making purchases of common stock related to the issuance of common stock or
rights under any of First Interstate's benefit plans for its directors, officers
or employees. Further, during an Extension Period, First Interstate would have
the ability to continue to make payments on Senior and Subordinated Debt. Prior
to the termination of any Extension Period, First Interstate may further extend
such Extension Period provided that such extension does not cause such Extension
Period to exceed 20 consecutive quarters or to extend beyond the Stated
Maturity. Upon the termination of any Extension Period and the payment of all
interest then accrued and unpaid (together with interest thereon at the annual
rate of 8 5/8%, compounded quarterly, to the extent permitted by applicable
law), First Interstate may elect to begin a new Extension Period subject to the
above requirements. There is no limitation on the number of times that First
Interstate may elect to begin an Extension Period prior to the Stated Maturity.
See "Description of the Trust Preferred Securities--Distributions" and
"Description of Junior Subordinated Debentures--Option to Defer Interest Payment
Period."
Because First Interstate believes the likelihood of it exercising its option
to defer payments of interest is remote, the Junior Subordinated Debentures will
be treated as issued without "original issue discount" for United States federal
income tax purposes. As a result, holders of Trust Preferred Securities will
include interest in taxable income under their own methods of accounting (i.e.,
cash or accrual). If First Interstate exercises its right to defer payments of
interest, the holders of Trust Preferred Securities will be required to include
their pro rata share of original issue discount in gross income as it accrues
for United States federal income tax (and possibly other) purposes in advance of
the receipt of cash. See "Certain Federal Income Tax Consequences--Interest
Income and Original Issue Discount." First Interstate has no current intention
of exercising its right to defer payments of interest by extending the interest
payment period on the Junior Subordinated Debentures. However, should First
Interstate elect to exercise its right to defer payments of interest in the
future, the market price of the Trust Preferred Securities is likely to be
adversely affected. A holder that disposes of such holder's Trust Preferred
Securities during an Extension Period, therefore, might not receive the same
return on such holder's investment as a holder that continues to hold the Trust
Preferred Securities.
TAX EVENT REDEMPTION, INVESTMENT COMPANY EVENT REDEMPTION OR CAPITAL TREATMENT
EVENT REDEMPTION
Upon the occurrence and during the continuation of a Tax Event, an
Investment Company Event or a Capital Treatment Event (whether occurring before
or after December 1, 2002), First Interstate has the right, if certain
conditions are met, to redeem the Junior Subordinated Debentures in whole (but
not in part) at 100% of the principal amount together with accrued but unpaid
interest to the date fixed for redemption within 90 days following the
occurrence of such Tax Event, Investment Company Event or Capital Treatment
Event and therefore cause a mandatory redemption of the Trust Preferred
Securities. The exercise of such right is subject to First Interstate having
received prior approval of the Federal Reserve to do so if then required under
applicable guidelines or policies of the Federal Reserve. See "Description of
the Trust Preferred Securities--Redemption."
12
<PAGE>
A "Tax Event" means the receipt by First Interstate and FIB Capital of an
opinion of counsel experienced in such matters to the effect that, as a result
of any amendment to, or change (including any announced prospective change) in,
the laws (or any regulations thereunder) of the United States or any political
subdivision or taxing authority thereof or therein, or as a result of any
official administrative pronouncement or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
such prospective change, pronouncement or decision is announced on or after the
original issuance of the Trust Preferred Securities, there is more than an
insubstantial risk that (i) FIB Capital is, or will be within 90 days of the
date of such opinion, subject to United States federal income tax with respect
to income received or accrued on the Junior Subordinated Debentures, (ii)
interest payable by First Interstate on the Junior Subordinated Debentures is
not, or within 90 days of such opinion, will not be, deductible by First
Interstate, in whole or in part, for United States federal income tax purposes,
or (iii) FIB Capital is, or will be within 90 days of the date of the opinion,
subject to more than a de minimus amount of other taxes, duties or other
governmental charges.
An "Investment Company Event" means the receipt by First Interstate and FIB
Capital of an opinion of counsel experienced in such matters to the effect that,
as a result of any change in law or regulation or a change in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority, FIB Capital is or will be considered an
"investment company" that is required to be registered under the Investment
Company Act of 1940, as amended (the "Investment Company Act"), which change
becomes effective on or after the original issuance of the Trust Preferred
Securities.
A "Capital Treatment Event" means the reasonable determination by First
Interstate that, as a result of any amendment to, or change (including any
announced prospective change) in, the laws (or any regulations thereunder) of
the United States or any political subdivision thereof or therein, or as a
result of any official or administrative pronouncement or action or judicial
decision interpreting or applying such laws or regulations, which amendment or
change is effective or such prospective change, pronouncement or decision is
announced on or after the date of issuance of the Trust Preferred Securities,
there is more than an insubstantial risk of impairment of First Interstate's
ability to treat the Trust Preferred Securities (or any substantial portion
thereof) as "Tier 1 capital" (or the then equivalent thereof) for purposes of
the capital adequacy guidelines of the Federal Reserve, as then in effect and
applicable to First Interstate.
POSSIBLE TAX LAW CHANGES AFFECTING THE TRUST PREFERRED SECURITIES
Congress and the Clinton Administration have from time to time considered
proposals that would deny an issuer a deduction for United States income tax
purposes for the payment of interest on instruments with characteristics similar
to the Junior Subordinated Debentures. Such proposals have been considered in
connection with recent legislation, including the recently enacted Taxpayer
Relief Act of 1997 (the "Relief Act"). Although no such proposals have been
included in the final provisions of recent legislation, including the Relief
Act, there can be no assurance that future legislation will not adversely affect
the tax treatment of the Junior Subordinated Debentures, potentially on a
retroactive basis. Such a change would give rise to a Tax Event which may permit
First Interstate, subject to approval of the Federal Reserve, to cause a
redemption of the Trust Preferred Securities by electing to prepay the Junior
Subordinated Debentures. See "Description of the Trust Preferred
Securities--Redemption," "Description of Junior Subordinated
Debentures--Redemption," and "Certain Federal Income Tax Consequences."
POSSIBLE DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF TRUST
PREFERRED SECURITIES
First Interstate will have the right at any time to dissolve FIB Capital
and, after satisfaction of liabilities to creditors of FIB Capital as required
by applicable law, cause the Junior Subordinated Debentures to be distributed to
the holders of the Trust Preferred Securities in liquidation of FIB Capital. The
exercise of such right is subject to First Interstate having received prior
approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. Because
13
<PAGE>
holders of the Trust Preferred Securities may receive Junior Subordinated
Debentures in liquidation of FIB Capital and because Distributions are otherwise
limited to payments on the Junior Subordinated Debentures, prospective
purchasers of the Trust Preferred Securities are also making an investment
decision with regard to the Junior Subordinated Debentures and should carefully
review all information regarding the Junior Subordinated Debentures contained
herein. See "Description of the Trust Preferred Securities--Liquidation
Distribution upon Dissolution" and "Description of Junior Subordinated
Debentures."
Under current United States federal income tax law and interpretations and
assuming, as expected, FIB Capital is classified as a grantor trust for such
purposes, a distribution of the Junior Subordinated Debentures upon a
liquidation of FIB Capital should not be a taxable event to holders of the Trust
Preferred Securities. However, if a Tax Event were to occur which would cause
FIB Capital to be subject to United States federal income tax with respect to
income received or accrued on the Junior Subordinated Debentures, a distribution
of the Junior Subordinated Debentures by FIB Capital could be a taxable event to
FIB Capital and the holders of the Trust Preferred Securities. See "Certain
Federal Income Tax Consequences--Distribution of Junior Subordinated Debentures
to Holders of Trust Preferred Securities."
LIMITED TRADING MARKET; MARKET PRICES
The Company does not intend to list the Trust Preferred Securities on any
securities exchange or include them for quotation on The Nasdaq Stock Market.
There is no existing public market for the Trust Preferred Securities, and there
can be no assurance that an active or liquid trading market for the Trust
Preferred Securities will develop following this offering, or that, if such a
market does develop, it will continue. Although the Underwriters have informed
FIB Capital and the Company that the Underwriters intend to make a market in the
Trust Preferred Securities offered hereby, the Underwriters are not obligated to
do so and any such market making activity may be terminated at any time without
notice to the holders of the Trust Preferred Securities. Future trading prices
of the Trust Preferred Securities will depend on many factors including, among
other things, prevailing interest rates, the operating results and financial
condition of the Company and the market for similar securities. As a result of
the existence of First Interstate's right to defer interest payments on or,
subject to prior approval of the Federal Reserve if then required under
applicable capital guidelines or policies of the Federal Reserve, shorten the
Stated Maturity of the Junior Subordinated Debentures, the market price of the
Trust Preferred Securities may be more volatile than the market prices of debt
securities that are not subject to such optional deferrals or reduction in
maturity. There can be no assurance as to the market prices for the Trust
Preferred Securities or the Junior Subordinated Debentures that may be
distributed in exchange for the Trust Preferred Securities if First Interstate
exercises its right to dissolve FIB Capital. Accordingly, the Trust Preferred
Securities that an investor may purchase, or the Junior Subordinated Debentures
that a holder of the Trust Preferred Securities may receive in liquidation of
FIB Capital, may trade at a discount from the price that the investor paid to
purchase the Trust Preferred Securities offered hereby.
SHORTENING OF STATED MATURITY OF JUNIOR SUBORDINATED DEBENTURES
First Interstate will have the right at any time to shorten the maturity of
the Junior Subordinated Debentures to a date not earlier than five years from
the date of issuance and thereby cause the Trust Preferred Securities to be
redeemed on such earlier date. The exercise of such right is subject to First
Interstate having received prior approval of the Federal Reserve if then
required under applicable capital guidelines or policies of the Federal Reserve.
See "Description of Junior Subordinated Debentures-- Redemption."
14
<PAGE>
LIMITATIONS ON DIRECT ACTIONS AGAINST FIRST INTERSTATE AND ON RIGHTS UNDER THE
GUARANTEE
The Guarantee guarantees to the holders of the Trust Preferred Securities
the following payments, to the extent not paid by FIB Capital: (i) any
accumulated and unpaid Distributions required to be paid on the Trust Preferred
Securities, to the extent that FIB Capital has funds on hand available therefor
at such time, (ii) the redemption price with respect to any Trust Preferred
Securities called for redemption, to the extent that FIB Capital has funds on
hand available therefor at such time and (iii) upon a voluntary or involuntary
dissolution, winding-up or liquidation of FIB Capital (unless the Junior
Subordinated Debentures are distributed to holders of the Trust Preferred
Securities), the lesser of (a) the aggregate of the Liquidation Amount and all
accumulated and unpaid Distributions to the date of payment to the extent that
FIB Capital has funds on hand available therefor at such time (the "Liquidation
Distribution") and (b) the amount of assets of FIB Capital remaining available
for distribution to holders of the Trust Preferred Securities after satisfaction
of liabilities to creditors of FIB Capital as required by applicable law. The
holders of not less than a majority in aggregate liquidation amount of the Trust
Preferred Securities have the right to direct the time, method and place of
conducting any proceeding for any remedy available to the Guarantee Trustee (as
defined herein), in respect of the Guarantee or to direct the exercise of any
trust power conferred upon the Guarantee Trustee under the Guarantee Agreement.
Any holder of the Trust Preferred Securities may institute a legal proceeding
directly against First Interstate to enforce its rights under the Guarantee
without first instituting a legal proceeding against FIB Capital, the Guarantee
Trustee or any other person or entity. If First Interstate were to default on
its obligation to pay amounts payable under the Junior Subordinated Debentures,
FIB Capital would lack funds for the payment of Distributions or amounts payable
on redemption of the Trust Preferred Securities or otherwise and, in such event,
holders of the Trust Preferred Securities would not be able to rely upon the
Guarantee for payment of such amounts. Instead, in the event a Debenture Event
of Default shall have occurred and be continuing and such event is attributable
to the failure of First Interstate to pay interest on or principal of the Junior
Subordinated Debentures on the payment date on which such payment is due and
payable, then a holder of Trust Preferred Securities may institute a legal
proceeding directly against First Interstate for enforcement of payment to such
holder of the principal of or interest on such Junior Subordinated Debentures
having a principal amount equal to the aggregate Liquidation Amount of the Trust
Preferred Securities of such holder (a "Direct Action"). In connection with such
Direct Action, First Interstate will have a right of set-off under the Indenture
to the extent of any payment made by First Interstate to such holder of Trust
Preferred Securities in the Direct Action. Except as described herein, holders
of Trust Preferred Securities will not be able to exercise directly any other
remedy available to the holders of the Junior Subordinated Debentures or assert
directly any other rights in respect of the Junior Subordinated Debentures. See
"Description of Junior Subordinated Debentures--Enforcement of Certain Rights by
Holders of Trust Preferred Securities" and "Description of Guarantee." The Trust
Agreement provides that each holder of Trust Preferred Securities by acceptance
thereof agrees to the provisions of the Guarantee Agreement and the Indenture.
LIMITED COVENANTS
The covenants in the Indenture are limited and there are no covenants
relating to First Interstate in the Trust Agreement. As a result, neither the
Indenture nor the Trust Agreement protects holders of Junior Subordinated
Debentures, or Trust Preferred Securities, respectively, in the event of a
material adverse change in First Interstate's or the Banks' financial condition
or results of operations or limits the ability of First Interstate or any
Subsidiary to incur additional indebtedness. Therefore, the provisions of these
governing instruments should not be considered a significant factor in
evaluating whether First Interstate will be able to comply with its obligations
under the Junior Subordinated Debentures or the Guarantee.
15
<PAGE>
LIMITED VOTING RIGHTS
Holders of Trust Preferred Securities will generally have limited voting
rights relating only to the modification of the Trust Preferred Securities, the
dissolution, winding-up or liquidation of FIB Capital and the exercise of FIB
Capital's rights as holder of the Junior Subordinated Debentures. Holders of
Trust Preferred Securities will not be entitled to vote to appoint, remove or
replace the Property Trustee or the Delaware Trustee as such voting rights are
vested exclusively in the holder of the Common Securities except upon the
occurrence of certain events described herein. In no event will the holders of
the Trust Preferred Securities have the right to vote to appoint, remove or
replace the Administrative Trustees; such voting rights are vested exclusively
in the holder of the Common Securities. The Property Trustee, the Administrative
Trustees and First Interstate may amend the Trust Agreement without the consent
of holders of Trust Preferred Securities to ensure that FIB Capital will be
classified for United States federal income tax purposes as a grantor trust or
to ensure that FIB Capital will not be required to register as an "investment
company," even if such action adversely affects the interests of such holders.
See "Description of Trust Preferred Securities--Voting Rights; Amendment of the
Trust Agreement" and "--Removal of Trustees."
ABILITY OF THE COMPANY TO EXECUTE ITS BUSINESS STRATEGY
The financial performance and profitability of the Company will depend on
its ability to execute its business strategy and manage its possible future
growth. Although the Company believes that it has substantially integrated the
recently acquired banks into the Company's operations, there can be no assurance
that unforeseen issues relating to the assimilation or prior operations of these
banks, including the emergence of any material undisclosed liabilities in excess
of the Company's indemnification rights, will not materially adversely affect
the Company. In addition, any future acquisitions or other possible future
growth may present operating and other problems that could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company's financial performance will also depend on the
Company's ability to maintain profitable operations through implementation of
its Strategic Vision. Moreover, the Company's future performance is subject to a
number of factors beyond its control, including pending and future federal and
state banking legislation, regulatory changes, unforeseen litigation outcomes,
inflation, lending and deposit rate changes, interest rate fluctuations,
increased competition and economic conditions. Accordingly, there can be no
assurance that the Company will be able to continue the growth or maintain the
level of profitability it has recently experienced.
INTEREST RATE RISK
Banking companies' earnings depend largely on the relationship between the
yield on earning assets, primarily loans and investments, and the cost of funds,
primarily deposits and borrowings. This relationship, known as the interest rate
spread, is subject to fluctuation and is affected by economic and competitive
factors which influence interest rates, the volume and mix of interest-earning
assets and interest-bearing liabilities and the level of non-performing assets.
Fluctuations in interest rates affect the demand of customers for the Company's
products and services. The Company is subject to interest rate risk to the
degree that its interest-bearing liabilities reprice or mature more slowly or
more rapidly or on a different basis than its interest-earning assets.
Significant fluctuations in interest rates could have a material adverse effect
on the Company's business, financial condition and results of operations.
ECONOMIC CONDITIONS; LIMITED GEOGRAPHIC DIVERSIFICATION
The Company's operations are located in Montana and Wyoming. As a result of
the geographic concentration of its operations, the Company's results depend
largely upon economic conditions in these areas. The Company believes the
primary industries in Montana and Wyoming include agriculture, energy, mining,
timber processing, tourism, government services, education and medical services.
A deterioration in economic conditions in the Company's market areas could
adversely impact the quality of the
16
<PAGE>
Company's loan portfolio and the demand for its products and services, and
accordingly, could have a material adverse effect on the Company's business,
financial condition and results of operations.
GOVERNMENT REGULATION AND MONETARY POLICY
The Company and the banking industry are subject to extensive regulation and
supervision under federal and state laws and regulations. The restrictions
imposed by such laws and regulations limit the manner in which the Company
conducts its banking business, undertakes new investments and activities and
obtains financing. This regulation is designed primarily for the protection of
the deposit insurance funds and consumers and not to benefit holders of the
Company's securities. Financial institution regulation has been the subject of
significant legislation in recent years and may be the subject of further
significant legislation in the future, none of which is in the control of the
Company. Significant new laws or changes in, or repeals of, existing laws could
have a material adverse effect on the Company's business, financial condition
and results of operations. Further, federal monetary policy, particularly as
implemented through the Federal Reserve System, significantly affects credit
conditions for the Company, and any unfavorable change in these conditions could
have a material adverse effect on the Company's business, financial condition
and results of operations. See "Regulation and Supervision."
COMPETITION
The banking and financial services business in both Montana and Wyoming is
highly competitive. The increasingly competitive environment is a result
primarily of changes in regulation, changes in technology and product delivery
systems and the accelerating pace of consolidation among financial services
providers. The Banks compete for loans, deposits and customers for financial
services with other commercial banks, savings and loan associations, securities
and brokerage companies, mortgage companies, insurance companies, finance
companies, money market funds, credit unions and other nonbank financial
services providers. Several of these competitors are much larger in total assets
and capitalization, have greater access to capital markets and offer a broader
array of financial services than the Banks. Moreover, the Riegal-Neal Interstate
Banking and Branching Efficiency Act of 1994 (the "Banking and Branching Act")
has increased competition in the Banks' markets, particularly from larger,
multi-state banks. There can be no assurance that the Company will be able to
compete effectively in its markets. Furthermore, developments increasing the
nature or level of competition could have a material adverse effect on the
Company's business, financial condition and results of operations. See
"Business--Competition" and "Regulation and Supervision."
DEPENDENCE ON KEY PERSONNEL
The Company's success depends to a significant extent on the management
skills of its existing executive officers and directors, many of whom have held
officer and director positions with the Company for many years. The loss or
unavailability of any of its key executives, including Homer A. Scott, Jr.,
Chairman of the Board, Thomas W. Scott, President and Chief Executive Officer or
Terrill R. Moore, Senior Vice President, Chief Financial Officer and Secretary,
could have a material adverse effect on the Company's business, financial
condition and results of operations. See "Management."
CONTROL BY AFFILIATES
The directors and executive officers of the Company beneficially own
approximately 67% of the outstanding common stock of the Company. Many of these
directors and executive officers are members of the Scott family, which
collectively owns approximately 82% of the outstanding common stock. By virtue
of such ownership, these affiliates are able to control the election of
directors and the determination of the Company's business, including
transactions involving any merger, share exchange, sale of assets outside the
ordinary course of business and dissolution. Such affiliates are also able to
control decisions affecting the Trust Preferred Securities, including the
possible deferral of quarterly Distributions during an Extension
17
<PAGE>
Period. See "Description of First Interstate Capital Stock" and "Security
Ownership of Certain Beneficial Owners and Management."
ASSET QUALITY
A significant source of risk for the Company arises from the possibility
that losses will be sustained by the Banks because borrowers, guarantors and
related parties may fail to perform in accordance with the terms of their loans.
The Company has adopted underwriting and credit monitoring procedures and credit
policies, including the establishment and review of the allowance for credit
losses, that management believes are appropriate to mitigate this risk by
assessing the likelihood of nonperformance, tracking loan performance and
diversifying the Company's credit portfolio. Such policies and procedures,
however, may not prevent unexpected losses that could have a material adverse
effect on the Company's business, financial condition and results of operations.
See "Business--Lending Activities."
FORWARD-LOOKING STATEMENTS
Certain statements contained in this Prospectus, including, without
limitation, statements containing the words "believes," "anticipates,"
"intends," "expects" and words of similar import, constitute "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such forward-looking statements involve known and unknown risks,
uncertainties and other factors that may cause the actual results, performance
or achievements of the Company to be materially different from any future
results, performance or achievements expressed or implied by such
forward-looking statements. Such factors include, among others, the following:
general economic and business conditions in those areas in which the Company
operates; demographic changes; competition; fluctuations in interest rates;
changes in business strategy or development plans; changes in governmental
regulation; credit quality; the availability of capital to fund the expected
expansion of the Company's business; and other factors referenced in this
Prospectus, including, without limitation, under the captions "Risk Factors,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business." Given these uncertainties, prospective investors are
cautioned not to place undue reliance on such forward-looking statements. The
Company disclaims any obligation to update any such factors or to publicly
announce the results of any revisions to any of the forward-looking statements
contained herein to reflect future events or developments.
18
<PAGE>
USE OF PROCEEDS
All of the proceeds from the sale of Trust Preferred Securities will be
invested by FIB Capital in the Junior Subordinated Debentures. First Interstate
intends to use $20.0 million of the proceeds from the sale of the Junior
Subordinated Debentures to FIB Capital to redeem the Company's outstanding
noncumulative perpetual preferred stock. The redemption is subject to regulatory
approval which the Company has obtained. The preferred stock provides for cash
dividends at the current annual rate of 8.53%. The Company intends to use the
remaining proceeds to reduce indebtedness outstanding under the Company's
revolving term loan. The loan bears interest at variable rates (7.55% weighted
average rate as of June 30, 1997), expires in December 2003, and is secured by
all of the outstanding capital stock of the Banks. As of June 30, 1997, the
amount outstanding under the revolving term loan was $31.2 million, with an
additional $8.8 million in borrowing capacity available thereunder. The Company
intends to use cash on hand to pay all underwriting commissions and offering
expenses, which are estimated to be approximately $1.9 million in the aggregate.
See "Management's Discussion And Analysis of Financial Condition and Results of
Operations--Financial Condition" and "Description of First Interstate Capital
Stock--Preferred Stock."
First Interstate is required by the Federal Reserve to maintain certain
levels of capital for bank regulatory purposes. On October 21, 1996, the Federal
Reserve announced that certain qualifying amounts of cumulative preferred
securities having the characteristics of the Trust Preferred Securities could be
included as Tier 1 capital for bank holding companies. Such Tier 1 capital
treatment, together with the Company's ability to deduct, for federal income tax
purposes, interest payable on the Junior Subordinated Debentures, will provide
First Interstate with a cost-effective means of obtaining capital for bank
regulatory purposes.
ACCOUNTING TREATMENT
For financial reporting purposes, FIB Capital will be treated as a
subsidiary of First Interstate and, accordingly, the accounts of FIB Capital
will be included in the consolidated financial statements of the Company. The
Trust Preferred Securities will be presented as a separate line item in the
consolidated balance sheet of the Company under the caption "Company Obligated
Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely
Junior Subordinated Debentures," and appropriate disclosures about the Trust
Preferred Securities, the Guarantee and the Junior Subordinated Debentures will
be included in the notes to consolidated financial statements. For financial
reporting purposes, the Company will record Distributions payable on the Trust
Preferred Securities as an expense in the consolidated statements of operations.
Future reports of the Company filed under the Securities Exchange Act of
1934, as amended ("the Exchange Act"), will include a footnote to the financial
statements stating that (i) FIB Capital is wholly-owned, (ii) the sole assets of
FIB Capital are the Junior Subordinated Debentures (specifying the principal
amount, interest rate and maturity date of such Junior Subordinated Debentures)
and (iii) the back-up obligations, in the aggregate, constitute a full and
unconditional guarantee by First Interstate of the obligations of FIB Capital
under the Trust Preferred Securities. FIB Capital will not provide separate
reports under the Exchange Act.
19
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1997, and as adjusted to give effect to the issuance of the Trust Preferred
Securities by FIB Capital offered hereby and the intended application of the
proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------
AS
ACTUAL ADJUSTED
---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Long-term debt.......................................................................... $ 56,184(1) $ 36,184
Company obligated mandatorily redeemable trust preferred securities of subsidiary trust
holding solely junior subordinated debentures(2)...................................... -- 40,000
Stockholders' equity:...................................................................
Preferred stock, no par value: 100,000 shares authorized, 20,000 outstanding.......... 20,000 0
Common stock, no par value: 20,000,000 shares authorized, 7,888,644 outstanding....... 8,350 8,350
Unrealized gain on securities, available for sale, net................................ 370 370
Retained earnings..................................................................... 125,205 125,205
---------- ----------
Total stockholders' equity........................................................ 153,925 133,925
---------- ----------
Total capitalization.................................................................... $ 210,109 $ 210,109
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(1) Includes approximately $52.0 million in Senior and Subordinated Debt and
$4.2 million in indebtedness of a subsidiary Bank.
(2) The subsidiary trust is FIB Capital, which will hold the Junior Subordinated
Debentures as its sole asset. The Trust Preferred Securities are issued by
FIB Capital. The sole assets of FIB Capital will consist of the $41,237,125
aggregate principal amount of Junior Subordinated Debentures issued by First
Interstate to FIB Capital. The Junior Subordinated Debentures will bear
interest at the rate of 8 5/8% per annum and will mature on December 1, 2027
which date may be shortened to a date not earlier than December 1, 2002 if
certain conditions are met. The Junior Subordinated Debentures are
redeemable prior to maturity at the option of First Interstate, subject to
any required prior approval of the Federal Reserve, (i) on or after December
1, 2002, in whole at any time or in part from time to time, or (ii) at any
time, in whole (but not in part), upon the occurrence and continuation of a
Tax Event, an Investment Company Event or a Capital Treatment Event. See
"Description of Junior Subordinated Debentures--Redemption." First
Interstate owns all of the Common Securities of FIB Capital.
REGULATORY CAPITAL RATIOS
The following table sets forth the consolidated capital ratios of the
Company at June 30, 1997, and as adjusted to give effect to the issuance of the
Trust Preferred Securities by FIB Capital offered hereby and the intended
application of the proceeds therefrom. See "Use of Proceeds."
<TABLE>
<CAPTION>
JUNE 30, 1997
--------------------
AS
ACTUAL ADJUSTED
--------- ---------
<S> <C> <C>
Tier 1 risk-based capital................................................ 7.68% 8.92%
Total risk-based capital................................................. 10.21% 11.45%
Leverage ratio........................................................... 5.72% 6.65%
</TABLE>
20
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data with respect to the
Company's consolidated financial position as of December 31, 1996, and 1995 and
its results of operations for the fiscal years ended December 31, 1996, 1995,
and 1994, has been derived from the consolidated financial statements of the
Company appearing elsewhere in this Prospectus, which have been audited by KPMG
Peat Marwick LLP, independent certified public accountants. This data should be
read in conjunction with "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and such consolidated financial statements,
including the notes thereto. The selected consolidated financial data with
respect to the Company's consolidated financial position as of December 31,
1994, 1993, and 1992, and its results of operations for the fiscal years ended
December 31, 1993, and 1992, has been derived from the audited consolidated
financial statements of the Company, which are not presented herein. The
selected consolidated financial data with respect to the Company's consolidated
financial position as of June 30, 1997, and 1996, and its results of operations
for the six-month periods ended June 30, 1997, and 1996, has been derived from
the unaudited consolidated financial statements of the Company which, in the
opinion of management, reflect all adjustments of a normal recurring nature
necessary for a fair presentation of the financial position and results of
operations for such periods. The results for the six months ended June 30, 1997,
are not necessarily indicative of the results to be expected for the entire
year.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING DATA:
Interest income.................................. $ 80,330 $ 52,854 $ 117,925 $ 98,970 $ 80,230 $ 77,154 $ 78,707
Interest expense................................. 34,373 22,551 50,019 41,946 28,451 27,078 31,989
--------- --------- --------- --------- --------- --------- ---------
Net interest income.............................. 45,957 30,303 67,906 57,024 51,779 50,076 46,718
Provision for loan losses........................ 2,281 1,152 3,844 1,629 1,344 1,345 1,630
--------- --------- --------- --------- --------- --------- ---------
Net interest income after provision for loan
losses......................................... 43,676 29,151 64,062 55,395 50,435 48,731 45,088
Other operating income........................... 13,485 10,740 23,927 18,764 16,387 15,724 14,936
Other operating expenses......................... 35,987 23,207 53,395 45,978 41,227 39,686 37,985
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes....................... 21,174 16,684 34,594 28,181 25,595 24,769 22,039
Provision for income taxes....................... 8,080 6,414 13,351 10,844 9,861 9,321 8,179
--------- --------- --------- --------- --------- --------- ---------
Net income....................................... $ 13,094 $ 10,270 $ 21,243 $ 17,337 $ 15,734 $ 15,448 $ 13,860
--------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- ---------
Net income applicable to common stock............ $ 12,247 $ 10,270 $ 20,818 $ 17,337 $ 15,734 $ 15,448 $ 13,860
Net income per common share...................... $ 1.54 $ 1.31 $ 2.64 $ 2.21 $ 2.00 $ 1.96 $ 1.74
Dividends per common share....................... $ 0.46 $ 0.38 $ 0.77 $ 0.48 $ 0.40 $ 0.34 $ 0.28
Weighted average common shares outstanding....... 7,936,708 7,802,892 7,881,024 7,843,644 7,850,188 7,891,160 7,984,244
BALANCE SHEET DATA (AT PERIOD END):
Total assets..................................... $2,131,351 $1,350,478 $2,063,837 $1,351,215 $1,134,105 $1,097,469 $1,022,392
Loans............................................ 1,475,852 940,248 1,375,479 870,378 751,518 667,385 607,125
Allowance for loan losses........................ 28,757 15,406 27,797 15,171 13,726 13,373 12,965
Investment securities............................ 396,931 247,317 403,571 258,737 251,745 249,754 226,821
Deposits......................................... 1,673,035 1,082,487 1,679,424 1,099,069 939,857 936,793 900,465
Long-term debt................................... 56,184 10,234 64,667 15,867 5,449 6,853 5,254
Stockholders' equity............................. 153,925 115,547 146,061 109,366 95,272 84,163 71,852
(CONTINUED ON NEXT PAGE)
</TABLE>
21
<PAGE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
(CONTINUED FROM PREVIOUS PAGE)
<CAPTION>
SIX MONTHS
ENDED
JUNE 30, YEARS ENDED DECEMBER 31,
-------------------- -----------------------------------------------------
1997 1996 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OPERATING RATIOS:
Return on average assets......................... 1.27% 1.55% 1.41% 1.39% 1.44% 1.50% 1.43%
Return on average common stockholders' equity.... 18.94% 18.30% 17.84% 16.98% 17.64% 19.97% 20.43%
Average stockholders' equity to average assets... 7.24% 8.48% 8.08% 8.20% 8.15% 7.52% 6.98%
Net interest margin.............................. 5.11% 5.19% 5.15% 5.19% 5.34% 5.51% 5.45%
Net interest spread.............................. 4.46% 4.52% 4.47% 4.45% 4.76% 4.98% 4.87%
Common stock dividend payout ratio(1)............ 29.87% 29.01% 29.17% 21.72% 20.00% 17.35% 16.09%
Ratio of earnings to fixed charges(2):
Excluding interest on deposits................. 4.85x 14.50x 8.74x 9.50x 12.34x 30.66x 20.25x
Including interest on deposits................. 1.59x 1.73x 1.68x 1.66x 1.87x 1.91x 1.69x
ASSET QUALITY RATIOS:
Non-performing assets to total loans and
OREO(3)........................................ 0.95% 0.99% 1.20% 0.97% 0.94% 1.44% 2.84%
Allowance for loan losses to total loans......... 1.95% 1.64% 2.02% 1.74% 1.83% 2.00% 2.14%
Allowance for loan losses to non-performing
loans(4)....................................... 223.42% 191.19% 185.10% 213.74% 259.62% 205.49% 104.09%
Net charge-offs to average loans................. 0.09% 0.10% 0.17% 0.13% 0.14% 0.15% 0.15%
REGULATORY CAPITAL RATIOS:
Tier 1 capital to risk-weighted assets........... 7.68% 10.48% 7.35% 10.40% 11.32% 10.96% 9.55%
Total capital to risk-weighted assets............ 10.21% 11.73% 9.98% 11.65% 12.58% 12.22% 11.05%
Leverage ratio................................... 5.72% 7.89% 5.28% 7.28% 8.12% 7.28% 6.60%
</TABLE>
- ------------------------------
(1) Dividends per common share divided by net income per common share.
(2) For purposes of computing the ratio of earnings to fixed charges, earnings
represents income before income taxes and fixed charges. Fixed charges
represent interest expense and preferred stock dividends, which dividends
commenced in October 1996. Deposits include interest-bearing deposits and
repurchase agreements. Without including preferred stock dividends in fixed
charges and excluding interest on deposits, the ratio of earnings to fixed
charges for the six months ended June 30, 1997 and the year ended December
31, 1996 were 5.89x and 9.91x, respectively. Without including preferred
stock dividends in fixed charges and including interest on deposits, the
ratio of earnings to fixed charges for the six months ended June 30, 1997
and the year ended December 31, 1996 were 1.61x and 1.68x, respectively.
(3) For purposes of computing the ratio of non-performing assets to total loans
and OREO, non-performing assets include non-accrual loans, loans past due 90
days or more and still accruing, restructured debt and other real estate
owned.
(4) For purposes of computing the ratio of allowance for loan losses to
non-performing loans, non-performing loans include non-accrual loans, loans
past due 90 days or more and still accruing and restructured debt.
22
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The following discussion and analysis is intended to provide greater details
of the results of operations and financial condition of the Company. The
following discussion should be read in conjunction with the information under
"Selected Consolidated Financial Data" and the Company's consolidated financial
statements, including the notes thereto, and other financial data appearing
elsewhere in this Prospectus. Certain statements included in the following
discussion constitute "forward-looking statements" which involve various risks
and uncertainties. The Company's actual results may differ significantly from
those anticipated in such forward-looking statements. Factors that might cause
such a difference include, without limitation, the ability of the Company to
execute its business strategy, interest rate risk, economic conditions,
government regulation, competition and asset quality. For additional information
concerning these and other factors, see "Risk Factors."
The Company, through the Banks, operates 31 banking offices in 23
communities throughout Montana and Wyoming. The Company's income is derived
primarily from the net interest income and other operating income generated by
the Banks. Net interest income consists of the excess of interest income,
received primarily on customer loans and investment securities, over interest
expense, paid principally on customer deposits and indebtedness. Other operating
income primarily includes service charges on deposit accounts, data processing
fees and income from fiduciary activities.
The Company has continued to increase earnings during the periods reported
herein while expanding its operations. A majority of the Company's growth in
recent years has resulted from acquisitions of other banks. In October 1996, the
Company acquired First Interstate Bank of Montana, N.A. and First Interstate
Bank of Wyoming, N.A., which collectively included six branch banks (the "FIB
Banks"). In December 1996, the Company acquired Mountain Bank of Whitefish ("FIB
Whitefish"), which included two branch locations. Immediately prior to the
acquisitions, the FIB Banks had assets of $553.2 million and deposits of $423.9
million, and FIB Whitefish had assets of $66.9 million and deposits of $54.4
million. Prior to the acquisition, the FIB Banks were operated as branch
locations without independent administrative support, data processing and other
required services. In connection with the acquisition, the Company increased its
staffing at both the holding company and branch levels to provide the
administrative, data processing and other operational support to facilitate
integration and operation of such banks.
The acquisitions of the FIB Banks and FIB Whitefish (collectively, the
"Acquired Banks") were accounted for under the purchase method of accounting.
Amortization of goodwill resulting from such acquisitions total approximately
$2.1 million annually. The Company believes that the Acquired Banks have been
substantially integrated into the Company's operations.
RESULTS OF OPERATIONS
The Company's increased earnings and expansion of operations have been
effected through a successful combination of acquisitions and internal growth.
The internal growth experienced by the Company is reflected by an increased
volume of customer loans and deposits, without giving effect to such
acquisitions. The Company's internal growth has largely been accomplished
through its effective offering and promotion of competitively priced products
and services. See "Business--Growth Strategy." Net income increased 27.5% to
$13.1 million for the six months ended June 30, 1997 from $10.3 million for the
six months ended June 30, 1996. This increase resulted equally from internal
growth and earnings provided by the Acquired Banks. Without giving effect to the
Acquired Banks, management estimates that net income for the six months ended
June 30, 1997 would have been approximately $10.9 million. Net income increased
22.5% to $21.2 million in 1996 from $17.3 million in 1995, due principally to
internal growth.
23
<PAGE>
Net income increased 10.2% to $17.3 million in 1995 from $15.7 million in
1994. In 1995, the Company acquired Citizens BancShares, Inc. and First Park
County Bancshares, Inc. (collectively, the "Citizens and First Park Banks"),
which occurred in January and May, respectively, of such year. These banks had
aggregate assets of $102.9 million and aggregate deposits of $82.9 million
immediately prior to the acquisitions. The increase in the Company's net income
in 1995 from 1994 was due primarily to internal growth, together with earnings
resulting from the acquisitions of the Citizens and First Park Banks.
NET INTEREST INCOME
Net interest income is the largest source of the Company's operating income.
As discussed above, net interest income is derived from interest, dividends and
fees received from interest-earning assets, less interest expense incurred on
interest-bearing liabilities. Interest earning assets primarily include loans
and investment securities. Interest-bearing liabilities primarily include
deposits and various forms of indebtedness.
For the six months ended June 30, 1997, net interest income increased 51.7%
to $46.0 million from $30.3 million for the corresponding period in 1996. This
increase resulted primarily from the incremental net interest income provided by
the Acquired Banks. Without giving effect to the Acquired Banks, management
estimates the net interest income for the six months ended June 30, 1997 would
have been approximately $34.0 million.
Net interest income increased 19.1% to $67.9 million in 1996 from $57.0
million in 1995. This increase resulted primarily from the Acquired Banks and
from a higher volume of loans due to internal growth. Net interest income
provided by the Acquired Banks in 1996 was approximately $5.3 million.
In 1995, net interest income increased 10.1% to $57.0 million from $51.8
million in 1994. Of the increase, approximately $3.2 million was related to net
interest income generated by the Citizen and First Park Banks. The balance of
the increase was derived principally from internal expansion of loans and
deposits.
The following table presents, for the periods indicated, condensed average
balance sheet information for the Company, together with interest income and
yields earned on average interest-earning assets, and interest expense and rates
paid on average interest-bearing liabilities. Average balances are averaged
daily balances.
24
<PAGE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------
SIX MONTHS ENDED
JUNE 30, 1997 1996 1995
----------------------------------- --------------------------------- ---------
AVERAGE AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE INTEREST YIELD/ RATE BALANCE INTEREST YIELD/ RATE BALANCE
--------- ----------- ----------- --------- --------- ----------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(1)............................. $1,412,513 $ 68,339 9.76% $1,014,901 $ 100,039 9.86% $ 837,288
U.S. and agencies securities......... 343,244 10,021 5.89% 244,314 13,951 5.71% 199,750
Federal funds sold................... 25,753 711 5.57% 25,462 1,342 5.27% 36,665
Other securities..................... 24,127 741 6.19% 21,868 1,392 6.37% 13,904
Tax exempt securities(2)............. 20,447 826 8.15% 19,100 1,575 8.25% 15,704
Interest-bearing deposits in banks... 3,517 97 5.56% 6,555 376 5.74% 6,276
--------- ----------- --------- --------- ---------
Total interest-earning assets.... 1,829,601 80,735 8.90% 1,332,200 118,675 8.91% 1,109,587
Noninterest-earning assets............. 233,537 173,888 134,912
--------- --------- ---------
Total assets..................... $2,063,138 $1,506,088 $1,244,499
--------- --------- ---------
--------- --------- ---------
Interest-bearing liabilities:
Demand deposits...................... $ 260,648 2,226 1.72% $ 210,153 4,489 2.14% $ 171,933
Savings deposits..................... 447,994 8,353 3.76% 301,003 11,305 3.76% 264,198
Time deposits........................ 604,888 16,891 5.63% 464,712 26,328 5.67% 380,117
Borrowings(3)........................ 183,937 4,415 4.84% 126,135 5,869 4.65% 97,799
Long-term debt....................... 63,087 2,488 7.95% 23,760 2,028 8.54% 13,147
--------- ----------- --------- --------- ---------
Total interest-bearing
liabilities.................... 1,560,554 34,373 4.44% 1,125,763 50,019 4.44% 927,194
--------- ----------- --------- --------- ---------
Noninterest-bearing deposits........... 331,652 242,117 203,258
Other noninterest-bearing
liabilities.......................... 21,614 16,487 11,961
Stockholders' equity................... 149,318 121,721 102,086
--------- --------- ---------
Total liabilities and
stockholders' equity........... $2,063,138 $1,506,088 $1,244,499
--------- --------- ---------
--------- --------- ---------
Net interest income.................... 46,362 68,656
Interest rate spread................... 4.46% 4.47%
Contribution of interest free funds.... 0.65% 0.68%
Net yield on interest-earnings
assets(4)............................ 5.11% 5.15%
Less FTE adjustments................... 405 750
----------- ---------
Net interest income per consolidated
statements of income................. $ 45,957 $ 67,906
----------- ---------
----------- ---------
<CAPTION>
1994
-----------------------------------
AVERAGE AVERAGE AVERAGE
INTEREST YIELD/ RATE BALANCE INTEREST YIELD/ RATE
----------- ----------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans(1)............................. $ 83,735 10.00% $ 705,690 $ 65,936 9.34%
U.S. and agencies securities......... 11,278 5.65% 218,012 11,853 5.44%
Federal funds sold................... 2,095 5.71% 27,994 1,193 4.26%
Other securities..................... 864 6.21% 12,599 926 7.35%
Tax exempt securities(2)............. 1,230 7.83% 8,133 522 6.42%
Interest-bearing deposits in banks... 372 5.93% 3,381 149 4.41%
-----------
Total interest-earning assets.... 99,574 8.97% 975,809 80,579 8.26%
Noninterest-earning assets............. 118,606
---------
Total assets..................... $1,094,415
---------
---------
Interest-bearing liabilities:
Demand deposits...................... 4,248 2.47% $ 163,318 3,487 2.14%
Savings deposits..................... 9,917 3.75% 265,521 8,071 3.04%
Time deposits........................ 21,733 5.72% 306,064 13,688 4.47%
Borrowings(3)........................ 4,866 4.98% 72,367 2,691 3.72%
Long-term debt....................... 1,182 8.99% 6,195 514 8.30%
----------- --------- -----------
Total interest-bearing
liabilities.................... 41,946 4.52% 813,465 28,451 3.50%
----------- --------- -----------
Noninterest-bearing deposits........... 181,885
Other noninterest-bearing
liabilities.......................... 9,855
Stockholders' equity................... 89,210
---------
Total liabilities and
stockholders' equity........... $1,094,415
---------
---------
Net interest income.................... 57,628 52,128
Interest rate spread................... 4.45% 4.76%
Contribution of interest free funds.... 0.74% 0.58%
Net yield on interest-earnings
assets(4)............................ 5.19% 5.34%
Less FTE adjustments................... 604 349
----------- -----------
Net interest income per consolidated
statements of income................. $ 57,024 $ 51,779
----------- -----------
----------- -----------
</TABLE>
- ------------------------------
(1) Average loan balances include non-accrual loans. Loan fees included in
interest income were $3.1 million, $5.0 million, $4.1 million, and $4.2
million for the six months ended June 30, 1997 and the years ended December
31, 1996, 1995 and 1994, respectively.
(2) Interest income and average rates for tax exempt securities are presented on
a fully-taxable equivalent basis.
(3) Includes interest on Federal funds purchased, securities sold under
repurchase agreements and other borrowed funds. Excludes long-term debt.
(4) Net yield on interest-earning assets during the period equals (i) the
difference between interest income on interest-earning assets and the
interest expense on interest-bearing liabilities, divided by (ii) average
interest-earning assets for the period.
25
<PAGE>
The most significant impact on the Company's net interest income between
periods is derived from the interaction of changes in the volume of and rates
earned or paid on interest-earning assets and interest-bearing liabilities. The
volume of loans, investment securities and other interest-earning assets,
compared to the volume of interest-bearing deposits and indebtedness, combined
with the spread, produces the changes in the net interest income between
periods.
The table below sets forth, for the periods indicated, a summary of the
changes in interest income and interest expense resulting from estimated changes
in average asset and liability balances (volume) and estimated changes in
average interest rates (rate). Changes which are not due solely to volume or
rate have been allocated to these categories based on the respective percent
changes in average volume and average rate as they compare to each other.
<TABLE>
<CAPTION>
YEAR ENDED
SIX MONTHS ENDED YEAR ENDED DECEMBER 31, 1995
JUNE 30, 1997 DECEMBER 31, 1996 COMPARED WITH
COMPARED WITH COMPARED WITH DECEMBER 31, 1994
JUNE 30, 1996 DECEMBER 31, 1995 FAVORABLE
FAVORABLE (UNFAVORABLE) FAVORABLE (UNFAVORABLE) (UNFAVORABLE)
------------------------------- ------------------------------- --------------------
VOLUME RATE NET VOLUME RATE NET VOLUME RATE
--------- --------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans................................ $ 25,613 $ (1,980) $ 23,633 $ 17,761 $ (1,457) $ 16,304 $ 12,291 $ 5,509
U.S. and agencies securities......... 3,404 353 3,757 2,518 155 2,673 (993) 418
Federal funds sold................... 177 (66) 111 (640) (113) (753) 369 533
Other securities..................... 93 (19) 74 495 33 528 96 (158)
Tax exempt securities(1)............. 30 (1) 29 266 (67) 199 486 (34)
Interest-bearing deposits in banks... (127) (1) (128) 17 (13) 4 128 95
--------- --------- --------- --------- --------- --------- --------- ---------
Total interest income............ 29,190 (1,714) 27,476 20,417 (1,462) 18,955 12,377 6,363
--------- --------- --------- --------- --------- --------- --------- ---------
Interest-bearing liabilities:
Demand deposits...................... 915 (660) 255 944 (703) 241 184 577
Savings deposits..................... 3,530 (205) 3,325 1,469 (81) 1,388 (23) 1,869
Time deposits........................ 4,997 (563) 4,434 4,647 (52) 4,595 3,320 4,725
Borrowings(2)........................ 1,890 (19) 1,909 1,318 (315) 1,003 1,267 908
Long-term debt....................... 1,941 (42) 1,899 906 (60) 846 625 43
--------- --------- --------- --------- --------- --------- --------- ---------
Total interest expense........... 13,273 (1,451) 11,822 9,284 (1,211) 8,073 5,373 8,122
--------- --------- --------- --------- --------- --------- --------- ---------
Increase (decrease) in net interest
income............................... $ 15,917 $ (263) $ 15,654 $ 11,133 $ (251) $ 10,882 $ 7,004 $ (1,759)
--------- --------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- --------- --------- ---------
<CAPTION>
NET
---------
<S> <C>
Interest-earning assets:
Loans................................ $ 17,800
U.S. and agencies securities......... (575)
Federal funds sold................... 902
Other securities..................... (62)
Tax exempt securities(1)............. 452
Interest-bearing deposits in banks... 223
---------
Total interest income............ 18,740
---------
Interest-bearing liabilities:
Demand deposits...................... 761
Savings deposits..................... 1,846
Time deposits........................ 8,045
Borrowings(2)........................ 2,175
Long-term debt....................... 668
---------
Total interest expense........... 13,495
---------
Increase (decrease) in net interest
income............................... $ 5,245
---------
---------
</TABLE>
- ------------------------------
(1) Interest income and average rates for tax exempt securities are presented on
a fully-taxable equivalent basis.
(2) Includes interest on Federal funds purchased, securities sold under
repurchase agreements and other borrowed funds. Excludes long-term debt.
Interest income increased 52.0% to $80.3 million for the six months ended
June 30, 1997 from $52.9 million for the comparable period in 1996. This
increase was due primarily to the significant increase in loans, the Company's
highest yielding asset. Loan volume increases resulted principally from the
Acquired Banks. Without taking into account the Acquired Banks, interest income
for the six months ended June 30, 1997 would have been approximately $57.0
million. This increase generally reflects a higher volume of loans processed as
a result of the Company's promotional and customer development activities. The
yield on average interest-earning assets for the first half of 1997 was 8.90%
compared to 9.01% for the first half of 1996.
In 1996, interest income increased 19.2% to $117.9 million from $99.0
million in 1995. This increase resulted primarily from the Acquired Banks,
offset by a slight decrease of six basis points in the yield on average
interest-earning assets from 8.97% in 1995 to 8.91% in 1996.
Interest income increased 23.4% to $99.0 million in 1995 from $80.2 million
in 1994. This increase resulted primarily from the acquisitions of the Citizens
and First Park Banks and from internal growth
26
<PAGE>
reflected in a greater volume of customer loans. In addition, the yield on
average interest-earning assets increased 71 basis points to 8.97% in 1995 from
8.26% in 1994.
Customer loan fees, included in interest income, increased 20.7% to $3.1
million in the first half of 1997 from $2.6 million in the first half of 1996.
Loan fees related to the Acquired Banks for the six months ended June 30, 1997
were approximately $701,000. Loan fees increased 23.5% to $5.0 million in 1996
from $4.1 million in 1995. Loan fees decreased 3.4% to $4.1 million in 1995 from
$4.2 million in 1994. Customer loan fees included in 1996 and 1995 that resulted
from bank acquisitions were $136,000 and $131,000, respectively. The decline in
customer loan fees in 1995 was principally the result of reduced real estate
loan processing in the first half of 1995. However, new real estate loans and
refinancing of existing loans rebounded in the last half of 1995 and continued
through 1996 resulting in an increase in real estate loan fees of $402,000 in
1996 (of which only $31,000 was related to bank acquisitions). Loan fees for
other categories of loans also increased in 1996 from 1995. Agricultural loan
fees increased $33,000, of which $10,000 was related to bank acquisitions. The
most significant increases, however, were in commercial and consumer loan fees
which contributed over half the overall increase in loan fees from 1995 to 1996.
Interest expense increased 52.4% to $34.4 million for the six months ended
June 30, 1997 from $22.6 million for the comparable period in 1996. This
increase was due primarily to the customer deposits and indebtedness incurred in
connection with the Acquired Banks. Without the Acquired Banks, interest expense
would have increased approximately $1.2 million due to higher levels of interest
bearing liabilities associated with internal growth. The rate on average
interest-bearing liabilities of 4.44% in the first half of 1997 decreased 11
basis points from 4.55% for the first six months of 1996.
In 1996, interest expense increased 19.2% to $50.0 million in 1996 from
$41.9 million in 1995. The increase resulted primarily from the customer
deposits and indebtedness incurred with respect to the Acquired Banks, offset in
part by a slight decrease of eight basis points in the rate on average interest-
bearing liabilities from 4.52% in 1995 to 4.44% in 1996.
Interest expense increased 47.4% to $41.9 million in 1995 from $28.5 million
in 1994. This increase was due primarily to the acquisitions of the Citizens and
First Park Banks, coupled with an increase of 102 basis points in the rate on
average interest-bearing liabilities from 3.50% in 1994 to 4.52% in 1995.
PROVISION FOR LOAN LOSSES
The provision for loan losses creates an allowance for future loan losses.
The loan loss provision for each year is dependent on many factors, including
loan growth, net charge-offs, changes in the composition of the loan portfolio,
delinquencies, management's assessment of the quality of the loan portfolio, the
value of the underlying collateral on problem loans and the general economic
conditions in the Company's markets. The Company performs a monthly assessment
of the risk inherent in its loan portfolio, as well as a detailed review of each
asset determined to have identified weaknesses. Based on this analysis, which
includes reviewing historical loss trends, current economic conditions, industry
concentrations and specific reviews of assets classified with identified
weaknesses, the Company makes provisions for potential loan losses. Specific
allocations are made for loans where the probability of a loss can be defined
and reasonably determined, while the balance of the provisions for loan losses
are based on historical data, delinquency trends, economic conditions in the
Company's markets and industry averages. Annual fluctuation in the provision for
loan losses result from management's assessment of the adequacy of the allowance
for loan losses, and ultimate loan losses may vary from current estimates.
For the six months ended June 30, 1997, the provision for loan losses
increased 98.0% to $2.3 million from $1.2 million for the six months ended June
30, 1996. Of this increase, approximately $967,000 was attributable to the
Acquired Banks. The remaining increase resulted from higher loan volumes and an
increase in classified assets.
The provision for loan losses increased 136.0% to $3.8 million in 1996 from
$1.6 million in 1995. Of the increase, approximately $500,000 was associated
with the various bank acquisitions described above.
27
<PAGE>
The remaining increase of $1.7 million was due principally to higher loan
volumes and an increase in non-performing and classified assets. Non-performing
loans, comprised of non-accrual loans and accruing loans past due 90 days or
more and restructured loans, increased only slightly to 1.1% of loans
outstanding at December 31, 1996 from 0.8% at December 31, 1995.
In 1995, the provision for loan losses increased 21.2% to $1.6 million from
$1.3 million in 1994. This increase resulted primarily from the acquisitions of
the Citizens and First Park Banks and higher loan volumes. Non-performing loans
were 0.8% of loans outstanding at December 31, 1995 compared to 0.7% at December
31, 1994.
For further information on non-performing and classified assets and the
allowance for loan losses, see "--Financial Condition--Non-Performing and
Classified Assets" herein.
OTHER OPERATING INCOME
The principal sources of other operating income include service charges on
deposit accounts, data processing fees, income from fiduciary activities,
comprised principally of fees earned on trust assets, and other service charges,
commissions and fees. Other operating income increased 25.6% to $13.5 million
for the first half of 1997 from $10.7 million for the first half of 1996. This
increase was attributable primarily to income provided by the Acquired Banks.
Without giving effect to the Acquired Banks, operating income from each of the
four principal categories showed increases for the six months ended June 30,
1997 over the comparable period in 1996. These increases, however, were
partially offset by one-time accounting adjustments, primarily with respect to
data processing fees, made in January 1996. Increases in other operating income
from 1994 to 1995 and from 1995 to 1996 were a function of changes in each of
the principal categories, as discussed below.
Service charges on deposit accounts increased 18.7% to $7.8 million in 1996
from $6.5 million in 1995. Of this increase, approximately $563,000 was
attributable to bank acquisitions, with the remainder resulting primarily from
increased overdraft fees. Service charges increased 11.0% to $6.5 million in
1995 from $5.9 million in 1994. This increase was primarily attributable to
increased transaction volumes associated with internal deposit growth and, to a
lesser extent, the acquisitions of the Citizens and First Park Banks.
As discussed above, increases in operating income from data processing
services for the six months ended June 30, 1997 compared to the first half of
1996 were more than offset by non-recurring accounting adjustments made in
January 1996. The Company serviced 542 locations in its ATM network at June 30,
1997 compared to 402 locations at June 30, 1996. Data processing fees increased
18.2% to $7.3 million in 1996 from $6.2 million in 1995 and 30.6% to $6.2
million in 1995 from $4.7 million in 1994. The increases in both years resulted
from a greater number of data processing customers using the Company's ATM
network and a corresponding increase in transaction volumes. Since 1995, the
Company's network expanded from 216 ATM locations at December 31, 1994 to 343
locations at year-end 1995, and to 477 locations at year-end 1996. Although
continued expansion of the Company's ATM network and increases in data
processing fees are expected to continue, the Company does not expect to
continue the rate of growth experienced in 1995 and 1996. There were no
increases in basic charges for data processing services in 1996 or 1995.
Income earned from fiduciary activities increased 20.7% to $3.2 million in
1996 from $2.6 million in 1995. Of this increase, approximately $243,000 was
attributable to trust services provided by the Acquired Banks, with the
remainder resulting from fee increases effected at year-end 1994 and increased
amounts under trust management due to the Company's expanded marketing of such
services in 1996 and 1995. Income from fiduciary activities was essentially
unchanged from 1994 to 1995.
In addition to the principal categories discussed above, other income
increased 217.0% to $2.8 million in 1996 from $888,000 in 1995. This increase
was primarily attributable to the sale of certain merchant credit card
processing assets at a gain of $1.4 million in 1996. The sale included alignment
with a third-
28
<PAGE>
party credit card processing provider that has enhanced the Company's ability to
compete in this highly specialized area.
OTHER OPERATING EXPENSES
Other operating expenses increased 55.1% to $36.0 million for the six months
ended June 30, 1997 from $23.2 million for the six months ended June 30, 1996.
This increase resulted primarily from both direct and indirect expenses
attributable to the Acquired Banks. Direct expenses totaled approximately $10.8
million for the first half of 1997. A significant portion of the remaining
increase was due to various indirect expenses associated with the Company's need
to increase its data processing support and other operational services to the
FIB Banks which had been previously operated as dependent branch offices prior
to their acquisition by the Company. The increases in administrative personnel
and other resources to provide such support and services were necessary to
facilitate integration of such banks into the Company's operations. In addition,
goodwill associated with the acquisition of the FIB Banks, together with the FIB
Whitefish acquisition, resulted in increased amortization expense of
approximately $900,000 for the first six months of 1997.
In 1996, other operating expenses increased 16.1% to $53.4 million from
$46.0 million in 1995. Of this increase, approximately $6.3 million was
attributable to direct and indirect expenses resulting from the Acquired Banks
and the acquisitions of the Citizens and First Park Banks. Other operating
expenses increased 11.5% to $46.0 million in 1995 from $41.2 million in 1994.
Approximately $3.3 million of this increase was related to the acquisitions of
the Citizens and First Park Banks.
The following table sets forth the dollar amount and percentage change for
components of other operating expenses for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, YEARS ENDED DECEMBER 31,
--------------------------------- -----------------------------------------------------------
1997 CHANGE 1996 1996 CHANGE 1995 CHANGE 1994
--------- ----------- --------- --------- ------------ --------- ------------ ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Salaries, wages and
benefits.................... $ 18,034 43.6% $ 12,560 $ 27,531 16.2% $ 23,694 11.9% $ 21,179
Occupancy, net................ 3,081 51.0% 2,040 4,505 15.0% 3,916 10.4% 3,546
Furniture and equipment....... 3,754 36.5% 2,751 6,249 19.2% 5,244 15.1% 4,558
FDIC insurance................ 101 * 1 5 (99.6)% 1,127 (43.9)% 2,008
Amortization of intangible
assets...................... 1,313 225.0% 404 1,383 87.9% 736 150.3% 294
Other real estate expense
(income), net............... (115) (27.7) (159) (214) (63.5)% (586) 28.2% (457)
Other expenses................ 9,819 75.0% 5,610 13,936 17.6% 11,847 17.3% 10,099
--------- --------- --------- --------- ---------
Total other operating
expenses.................... $ 35,987 55.1% $ 23,207 $ 53,395 16.1% $ 45,978 11.5% $ 41,227
--------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
- ------------------------
* Not meaningful.
The increase in salaries, wages and benefits from the first half of 1996 to
the first half of 1997 and from 1995 to 1996 were due primarily to the direct
and indirect expense attributable to the bank acquisitions, as discussed above.
The indirect expenses were related particularly to the Company's data processing
division and bank operation centers. The remainder of the increases in salaries,
wages and benefits during these periods were principally inflationary in nature.
The increase in expenses from 1994 to 1995 resulted primarily from the
acquisitions of the Citizens and the First Park Banks, and to a lesser extent,
from additional staffing for the Company's data processing division in 1995. The
Company purchased an additional data service center in Helena, Montana in 1994.
Given the Company's increasing data processing and transaction volumes, together
with the expansion of its ATM network, employee and
29
<PAGE>
related compensation expenses are expected to continue to increase, but at a
slower rate than has been experienced over the periods presented.
Occupancy and furniture and equipment expenses have increased over the
periods primarily as a result of the additional facilities associated with the
bank acquisitions, the expansion of the ATM network and additional equipment
used in the data processing division. Furthermore, these expenses have increased
due to higher depreciation, maintenance and other costs related to the foregoing
items and various other computer hardware and software, including upgrades, used
in the Company's operations.
Federal Deposit Insurance Corporation ("FDIC") deposit insurance premiums
increased to $101,000 for the six months ended June 30, 1997 from $1,000 for the
comparable prior-year period. This increase resulted from an increase in FDIC
premium assessments effective January 1, 1997. The significant decreases in
premiums from 1994 to 1995 and from 1995 to 1996 were due to a substantial FDIC
rate reduction that became effective in June 1995, followed by an additional
decrease in 1996. The FDIC rates reflect the Company's "well-capitalized" rating
by the FDIC.
Amortization of intangible assets consists of goodwill resulting from the
various bank acquisitions. The significant increases in amortization expense
over the periods are due to such acquisitions.
Other real estate owned ("OREO") losses, including provisions for losses on
OREO, are included net of any gains on sales of OREO. Variations in net OREO
expense during the periods resulted principally from fluctuations in such gains.
Although gains on sales are expected to continue through the liquidation of
remaining OREO properties, these gains are anticipated to decline as the number
and value of OREO properties decrease. OREO expense is directly related to
prevailing economic conditions, and such expense could increase significantly
should an unfavorable shift occur in the economic conditions of the Company's
markets.
Other expenses primarily include advertising and public relations costs,
legal, audit and other professional fees, and office supply, postage and
telephone expenses. Other expenses increased during the first six months of 1997
over the comparable period in 1996 as a result of the direct and indirect costs
associated with the bank acquisitions. Exclusive of these costs, during the six
months ended June 30, 1997 compared to the six months ended June 30, 1996, other
expenses increased (i) approximately $484,000 due principally to consulting fees
associated with revision of the Company's employee job evaluation system and
accruals for financial planning activities, and (ii) approximately $588,000 due
primarily to increased costs resulting from growth in the Company's customer
deposit base. The increases in other expenses from 1994 to 1995 and from 1995 to
1996 were due primarily to the direct and indirect costs related to the bank
acquisitions.
INCOME TAX EXPENSE
The Company's effective federal tax rate was 33.2%, 33.3%, 33.1% and 33.3%
for the six months ended June 30, 1997 and the years ended December 31, 1996,
1995 and 1994, respectively. State income tax has applied only to pretax
earnings of entities operating within Montana. The Company's effective state tax
rate was 5.0%, 5.3%, 5.4% and 5.2% for the six months ended June 30, 1997 and
the years ended December 31, 1996, 1995 and 1994, respectively.
FINANCIAL CONDITION
Total assets increased 3.3% to $2,131.4 million as of June 30, 1997 from
$2,063.8 million as of December 31, 1996. This increase resulted primarily from
internal growth in the Company's loan portfolio funded by increases in Federal
funds purchased, other borrowings and retained earnings. Total assets increased
52.7% to $2,063.8 million as of December 31, 1996 from $1,351.2 million as of
December 31, 1995. This increase was due principally to the significant
increases in loans and investment securities provided by the bank acquisitions,
funded by growth in deposits and increases in indebtedness.
30
<PAGE>
LOANS
Total loans increased 7.3% to $1,475.9 million as of June 30, 1997 from
$1,375.5 million as of December 31, 1996. As shown below, all categories of
loans showed increases in volumes during this period due to continued strong
economic conditions in the Company's markets, internal growth resulting from the
Company's marketing activities, and certain seasonal increases, particularly in
agricultural lending following traditional pay-downs during the fourth quarter.
The growth in loans during the first half of 1997 was slightly lower than the
growth rate during the first half of 1996 due primarily to a slowing in the
growth of consumer and real estate loans.
As of December 31, 1996, total loans increased 58.0% to $1,375.5 million
from $870.4 million as of December 31, 1995. This increase was attributable to
the growth in the loan portfolio provided by the Acquired Banks, and to a lesser
extent, internal growth which reflected continued favorable economic conditions.
The Company's loan portfolio consists of a mix of commercial, consumer, real
estate, agricultural and other loans, including fixed and variable rate loans.
Fluctuations in the loan portfolio are directly related to the economics of the
communities served by the Company. Thus, the Company's borrowers could be
adversely impacted by a downturn in these sectors of the economy which could
have a material adverse effect on the borrowers' abilities to repay their loans.
The following tables present the composition of the Company's loan portfolio
as of the dates indicated.
<TABLE>
<CAPTION>
AS OF
JUNE 30, AS OF DECEMBER 31,
---------------------- -----------------------------------------------------------------------------
1997 % 1996 % 1995 % 1994 % 1993
----------- --------- ----------- --------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
LOANS
Commercial......... $ 525,088 35.6% $ 471,458 34.3% $ 311,982 35.9% $ 262,290 34.9% $ 241,535
Consumer........... 502,919 34.1% 484,865 35.3% 300,711 34.5% 277,367 36.9% 245,493
Real estate........ 276,696 18.7% 274,141 19.9% 142,097 16.3% 112,251 14.9% 92,906
Agricultural....... 166,392 11.3% 143,572 10.4% 113,827 13.1% 98,194 13.1% 85,059
Other loans........ 4,757 0.3% 1,443 0.1% 1,761 0.2% 1,416 0.2% 2,392
----------- --------- ----------- --------- --------- --------- --------- --------- ---------
Total............ 1,475,852 100.0% 1,375,479 100.0% 870,378 100.0% 751,518 100.0% 667,385
----------- --------- ----------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- ---------
Less allowance for
loan losses........ 28,757 27,797 15,171 13,726 13,373
----------- ----------- --------- --------- ---------
Net loans............ $ 1,447,095 $ 1,347,682 $ 855,207 $ 737,792 $ 654,012
----------- ----------- --------- --------- ---------
----------- ----------- --------- --------- ---------
Ratio of allowance to
total loans........ 1.95% 2.02% 1.74% 1.83% 2.00%
----------- ----------- --------- --------- ---------
----------- ----------- --------- --------- ---------
<CAPTION>
% 1992 %
--------- --------- ---------
<S> <C> <C> <C>
LOANS
Commercial......... 36.2% $ 224,715 37.0%
Consumer........... 36.8% 216,222 35.6%
Real estate........ 13.9% 90,671 14.9%
Agricultural....... 12.7% 73,898 12.2%
Other loans........ 0.4% 1,619 0.3%
--------- --------- ---------
Total............ 100.0% 607,125 100.0%
--------- --------- ---------
--------- ---------
Less allowance for
loan losses........ 12,965
---------
Net loans............ $ 594,160
---------
---------
Ratio of allowance to
total loans........ 2.14%
---------
---------
</TABLE>
31
<PAGE>
The following table presents the maturity distribution of the Company's loan
portfolio and the sensitivity of the loans to changes in interest rates as of
December 31, 1996. The Company believes there have been no material changes in
the maturity distribution or interest rate sensitivity with respect to the loan
portfolio as of June 30, 1997.
<TABLE>
<CAPTION>
WITHIN ONE ONE YEAR TO AFTER FIVE
YEAR FIVE YEARS YEARS TOTAL
---------- ----------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial................................ $ 215,483 $ 186,458 $ 69,517 $ 471,458
Consumer.................................. 157,951 298,247 28,667 484,865
Real estate............................... 70,833 103,126 100,182 274,141
Agricultural.............................. 87,877 35,278 20,417 143,572
Other loans............................... 1,443 -- -- 1,443
---------- ----------- ---------- ------------
$ 533,587 $ 623,109 $ 218,783 $ 1,375,479
---------- ----------- ---------- ------------
---------- ----------- ---------- ------------
Loans at fixed interest rates............. $ 276,709 $ 505,102 $ 136,684 $ 918,495
Loans at variable interest rates.......... 250,056 118,007 82,099 450,162
Non-accrual loans......................... 6,822 -- -- 6,822
---------- ----------- ---------- ------------
$ 533,587 $ 623,109 $ 218,783 $ 1,375,479
---------- ----------- ---------- ------------
---------- ----------- ---------- ------------
</TABLE>
For additional information concerning the Company's loan portfolio and its
credit administration policies, see "Business--Lending Activities."
INVESTMENT SECURITIES
The Company's investment portfolio is managed to meet the Company's
liquidity needs and is utilized for pledging requirements for deposits of state
and political subdivisions and securities sold under repurchase agreements. The
portfolio is comprised of U.S. Treasury securities, U.S. government agency
securities, tax exempt securities, corporate securities, other mortgage-backed
securities, and other equity securities. Federal funds sold are additional
investments which are not classified as investment securities. Investment
securities classified as available-for-sale are recorded at fair market value,
while investment securities classified as held-to-maturity are recorded at cost.
Unrealized gains or losses, net of the deferred tax effect, are reported as
increases or decreases in stockholders' equity for available-for-sale
securities.
Investment securities remained relatively constant at $396.9 million as of
June 30, 1997, as compared to $403.6 million as of December 31, 1996. Investment
securities increased 56.0% to $403.6 million as of December 31, 1996 from $258.7
million as of December 31, 1994. This increase resulted from the substantial
investment securities held by the Acquired Banks at the time of acquisition. As
of December 31, 1996, there were no concentrations of investments greater than
10% of the Company's stockholders' equity in any individual security issuer,
other than the U.S. Treasury and U.S. Government agencies.
32
<PAGE>
The following table sets forth the book value, percentage of total
investment securities and average yield for the Company's investment securities
as of December 31, 1996. The Company believes there have been no material
changes in these items with respect to the investment securities as of June 30,
1997.
<TABLE>
<CAPTION>
% OF TOTAL
INVESTMENT AVERAGE
BOOK VALUE SECURITIES YIELD(1)
---------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
U.S. TREASURY SECURITIES
Maturing within one year...................................................... $ 49,368 5.26%
Maturing in one to five years................................................. 165,100 5.75%
----------
214,468
Mark-to-market adjustments on securities available-for-sale................... 153
----------
Total....................................................................... 214,621 53.18% 5.63%
---------- -----------
U.S. GOVERNMENT AGENCY SECURITIES
Maturing within one year...................................................... 50,639 5.51%
Maturing in one to five years................................................. 55,447 6.27%
Maturing in five to ten years................................................. 9,916 6.79%
Maturing after ten years...................................................... 28,517 6.67%
----------
144,519
Mark-to-market adjustments on securities available-for-sale................... 226
----------
Total....................................................................... 144,745 35.87% 6.11%
---------- -----------
TAX EXEMPT SECURITIES(1)
Maturing within one year...................................................... 1,927 6.67%
Maturing in one to five years................................................. 8,698 8.43%
Maturing in five to ten years................................................. 7,977 8.87%
Maturing after ten years...................................................... 908 10.02%
----------
19,510
Mark-to-market adjustments on securities available-for-sale................... 293
----------
Total....................................................................... 19,803 4.90% 8.38%
---------- -----------
CORPORATE SECURITIES
Maturing within one year...................................................... 1,591 5.65%
Maturing in one to five years................................................. 9,373 5.80%
Maturing after ten years...................................................... -- --
----------
10,964
----------
Mark-to-market adjustments on securities available-for-sale................... 2
----------
Total....................................................................... 10,966 2.72% 5.78%
---------- -----------
OTHER MORTGAGE-BACKED SECURITIES
Maturing in one to five years................................................. 1,652 5.48%
Maturing in five to ten years................................................. -- --
Maturing after ten years...................................................... 2,051 7.15%
----------
3,703
----------
Mark-to-market adjustments on securities available-for-sale................... 6
----------
Total....................................................................... 3,709 0.92% 6.40%
---------- -----------
EQUITY SECURITIES WITH NO STATED MATURITY 9,727 2.41% --
---------- -----------
Total....................................................................... $ 403,571 100.00% 5.81%
---------- -----------
---------- -----------
</TABLE>
- ------------------------
(1) Average yields have been calculated on a fully taxable basis.
33
<PAGE>
For additional information concerning investment securities, see Note 3 of
the Notes to Consolidated Financial Statements included herein.
DEPOSITS
The Company emphasizes developing total client relationships with its
customers in order to increase its core deposit base, which is the Company's
primary funding source. The Company's deposits consist primarily of the
following interest bearing accounts: demand deposits, savings accounts, IRAs and
time deposits (CDs). For additional information concerning the Company's
deposits, including its use of repurchase agreements, as discussed below, see
"Business--Deposits."
Deposits remained essentially unchanged at $1,673.0 million as of June 30,
1997, as compared to $1,679.4 million as of December 31, 1996. Deposits
increased 52.8% to $1,679.4 million as of December 31, 1996 from $1,099.1
million as of December 31, 1995. This increase resulted principally from the
deposits maintained by the Acquired Banks. Excluding the effect of the Acquired
Banks, deposits showed modest growth in the second half of 1996 following a
seasonal slowdown in deposits during the first half of the year.
The following table sets forth the dollar amount, percentage of total
deposits and average rate paid for each category of deposits as of June 30,
1997.
<TABLE>
<CAPTION>
AVERAGE RATE PAID FOR
% OF TOTAL JANUARY 1, 1997 TO
AMOUNT DEPOSITS JUNE 30, 1997
------------ ----------- ---------------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Non-interest bearing demand......................................... $ 353,189 21.11% --
Interest bearing:
Demand............................................................ 284,552 17.01% 1.72%
Savings........................................................... 410,038 24.51% 3.76%
IRAs.............................................................. 63,607 3.80% 5.71%
Time deposits, under $100......................................... 427,782 25.57% 5.65%
Time deposits, over $100.......................................... 133,867 8.00% 5.55%
------------ -----------
$ 1,673,035 100.00%
------------ -----------
------------ -----------
</TABLE>
For additional information concerning customer deposits as of December 31,
1996 and 1995, see Note 9 of the Notes to Consolidated Financial Statements.
OTHER BORROWINGS
In addition to deposits, the Company also uses Federal funds purchased and
repurchase agreements with commercial depositors as significant sources of
funding.
34
<PAGE>
The following table sets forth certain information regarding these two
sources of funding as of the dates indicated.
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
JUNE 30, ---------------------------------
1997 1996 1995 1994
---------- ---------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Federal funds purchased:
Balance at period end........................................... $ 61,900 $ 13,450 $ 3,125 $ 5,070
Average balance................................................. 43,001 18,687 16,596 15,358
Maximum amount outstanding at any month-end..................... 83,185 56,700 27,670 35,743
Average interest rate:
During the year............................................... 5.09% 5.58% 6.07% 4.49%
At period end................................................. 6.38% 5.61% 5.50% 5.54%
Securities sold under repurchase agreements:
Balance at period end........................................... $ 129,538 $ 129,137 $ 104,898 $ 73,805
Average balance................................................. 124,224 101,046 75,252 52,157
Maximum amount outstanding at any month-end..................... 131,275 129,137 104,898 74,058
Average interest rate:
During the year............................................... 4.56% 4.46% 4.73% 3.48%
At period end................................................. 4.88% 4.42% 4.85% 3.11%
</TABLE>
NON-PERFORMING AND CLASSIFIED ASSETS
Federal regulations require that each financial institution classify its
assets on a regular basis. Management generally places loans on non-accrual when
they become 90 days past due, unless they are well secured and in the process of
collection. When a loan is placed on non-accrual status, any interest previously
accrued but not collected is reversed from income. Loans are charged off when
management determines that collection has become unlikely. Restructured loans
are those where the Company has granted a concession on the interest paid or
original repayment terms due to financial difficulties of the borrower. OREO
consists of real property acquired through foreclosure on the related collateral
underlying defaulted loans.
The following table sets forth information regarding non-performing assets
as of the dates indicated.
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
JUNE 30, -----------------------------------------------------
1997 1996 1995 1994 1993 1992
--------- --------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Non-performing loans:
Non-accrual loans................................ $ 7,750 $ 6,822 $ 3,632 $ 3,134 $ 3,629 $ 5,496
Accruing loans past due 90 days or more.......... 3,769 6,432 1,711 534 1,353 2,940
Restructured loans............................... 1,352 1,763 1,755 1,619 1,526 4,020
--------- --------- --------- --------- --------- ---------
Total non-performing loans..................... 12,871 15,017 7,098 5,287 6,508 12,456
OREO............................................... 1,098 1,546 1,349 1,803 3,132 4,937
--------- --------- --------- --------- --------- ---------
Total non-performing assets........................ $ 13,969 $ 16,563 $ 8,447 $ 7,090 $ 9,640 $ 17,393
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
Non-performing assets to total loans and OREO...... 0.95% 1.20% 0.97% 0.94% 1.44% 2.84%
</TABLE>
Non-performing loans decreased 16.7% to $12.9 million as of June 30, 1997,
as compared to $15.0 million as of December 31, 1996. The increase in
non-performing loans as of December 31, 1995 to December 31, 1996 was due to the
non-performing loans held by the Acquired Banks, an increase in the loan
portfolio and a slight deterioration in the agricultural and consumer market
sector. Approximately $301,000, $405,000, $318,000, $296,000, $440,000 and
$691,000 of gross interest income would have been accrued if all loans on
non-accrual had been current in accordance with their original terms for the six
months ended June 30, 1997, and the years ended December 31, 1996, 1995, 1994,
1993 and 1992, respectively.
35
<PAGE>
The Company records OREO at the lower of carrying value or fair value less
estimated costs to sell. Estimated losses that result from the ongoing periodic
valuation of these properties are charged to earnings with a provision for
losses on foreclosed property in the period in which they are identified.
The Company reviews and classifies its assets on a regular basis according
to three classifications: "Substandard," "Doubtful" and "Loss." Substandard
loans have one or more defined weaknesses and are characterized by the distinct
possibility that the Company will sustain some loss if the deficiencies are not
corrected. Doubtful loans have the weaknesses of substandard assets with the
additional characteristic that the weaknesses make collection or liquidation in
full on the basis of currently existing facts, conditions and values
questionable, and there is a high probability of partial loss. A loan classified
as a Loss loan is considered uncollectible.
The following table sets forth classified loans as of the dates indicated.
<TABLE>
<CAPTION>
AS OF AS OF DECEMBER 31,
JUNE 30, -------------------------------
1997 1996 1995 1994
--------- --------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Substandard....................................... $ 26,254 $ 19,994 $ 12,936 $ 10,101
Doubtful.......................................... 2,957 2,321 1,522 2,188
Loss.............................................. 3,174 2,264 2,229 2,228
--------- --------- --------- ---------
Total........................................... $ 32,385 $ 24,579 $ 16,687 $ 14,517
--------- --------- --------- ---------
--------- --------- --------- ---------
Classified loans to total loans................... 2.19% 1.79% 1.92% 1.93%
Allowance for loan losses to classified loans..... 88.80% 113.09% 90.92% 94.55%
</TABLE>
With the exception of these classified loans, management is not aware of any
loans as of June 30, 1997 where the known credit problems of the borrowers would
cause management to have serious doubts as to the ability of such borrowers to
comply with their present loan repayment terms and which would result in such
loans being included in the non-performing asset table above at some future
date. Management cannot, however, predict the extent to which economic
conditions in the Company's market areas may worsen or the full impact such
conditions may have on the Company's loan portfolio. Accordingly, there can be
no assurances that other loans will not become 90 days or more past due, be
placed on non-accrual status or become restructured loans, in substance
foreclosures or OREO in the future.
ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan
losses based on management's evaluation of risk inherent in its loan portfolio
and economic conditions in the Company's market areas. See "--Provision for Loan
Losses" herein. The allowance is increased by provisions charged against
earnings and reduced by net loan charge-offs. Loans are charged off when they
are deemed to be uncollectible; recoveries are generally recorded only when cash
payments are received.
36
<PAGE>
The following table sets forth information concerning the Company's
allowance for loan losses as of the dates and for the years indicated.
<TABLE>
<CAPTION>
AS OF AND FOR THE YEARS ENDED DECEMBER 31,
------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Balance as of January 1,........................... $ 15,171 $ 13,726 $ 13,373 $ 12,965 $ 12,257
Beginning allowances of Acquired Banks............. 10,553 917 -- -- --
Charge-offs:
Commercial....................................... 1,127 393 398 777 1,036
Consumer......................................... 2,384 1,679 1,425 1,035 1,113
Real estate...................................... 27 20 53 20 134
Agricultural..................................... 220 25 4 20 69
------------ ---------- ---------- ---------- ----------
Total charge-offs............................ 3,758 2,117 1,880 1,852 2,352
Recoveries:
Commercial....................................... 850 252 299 353 467
Consumer......................................... 974 557 472 455 491
Real estate...................................... 9 119 36 7 22
Agricultural..................................... 154 88 82 100 450
------------ ---------- ---------- ---------- ----------
Total recoveries............................. 1,987 1,016 889 915 1,430
------------ ---------- ---------- ---------- ----------
Net charge-offs.................................... 1,771 1,101 991 937 922
Provision for loan losses.......................... 3,844 1,629 1,344 1,345 1,630
------------ ---------- ---------- ---------- ----------
Balance at the end of period....................... $ 27,797 $ 15,171 $ 13,726 $ 13,373 $ 12,965
------------ ---------- ---------- ---------- ----------
------------ ---------- ---------- ---------- ----------
Period end loans................................... $ 1,375,479 $ 870,378 $ 751,518 $ 667,385 $ 607,125
Average loans...................................... $ 1,014,901 $ 837,288 $ 705,690 $ 641,411 $ 595,026
Net charge-offs to average loans................... 0.17% 0.13% 0.14% 0.15% 0.15%
Allowance to period end loans...................... 2.02% 1.74% 1.83% 2.00% 2.14%
</TABLE>
For the six months ended June 30, 1997, net charge-offs were $1.3 million
and the provision for loan losses was $2.3 million. These two line items show
increases from prior comparative periods due to the expanded loan portfolio
resulting primarily from the Acquired Banks. As of June 30, 1997, the allowance
for loan losses was $28.8 million, representing an increase of $960,000 from the
allowance as of December 31, 1996. For the first half of 1997, net charge-offs
to average loans were 0.09%, reflecting a slight decrease from prior periods.
The allowance to period end loans was 1.95% as of June 30, 1997, which
represents a minor decrease from such percentage as of December 31, 1996.
Management considers changes in the size and character of the loan
portfolio, changes in non-performing and past due loans, historical loan loss
experience, and the existing and prospective economic conditions when
determining the adequacy of the allowance for loan losses. Although management
believes that the allowance for loan losses is adequate to provide for both
potential losses and estimated inherent losses in the portfolio, future
provisions will be subject to continuing evaluations of the inherent risk in the
portfolio and if the economy declines or asset quality deteriorates, material
additional provisions could be required.
The following tables provide a summary of the allocation of the allowance
for loan losses for specific loan categories as of the dates indicated. The
allocations presented should not be interpreted as an indication that charges to
the allowance for loan losses will be incurred in these amounts or proportions,
or that the portion of the allowance allocated to each loan category represents
the total amount available for future losses that may occur within these
categories. The unallocated portion of the allowance for loan losses and the
total allowance is applicable to the entire loan portfolio.
37
<PAGE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------------------------------------------
AS OF JUNE 30,
1997 1996 1995 1994
------------------------ ------------------------ ------------------------ ------------------------
% OF % OF % OF % OF
ALLOCATED CATEGORY TO ALLOCATED CATEGORY TO ALLOCATED CATEGORY TO ALLOCATED CATEGORY TO
RESERVES TOTAL LOANS RESERVES TOTAL LOANS RESERVES TOTAL LOANS RESERVES TOTAL LOANS
----------- ----------- ----------- ----------- ----------- ----------- ----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial............ $ 833 35.6% $ 594 34.3% $ 789 35.9% $ 791 34.9%
Consumer.............. 1,919 34.1% 1,280 35.3% 1,118 34.5% 1,154 36.9%
Real estate........... 74 18.7% -- 19.9% -- 16.3% 3 14.9%
Agricultural.......... 348 11.3% 390 10.4% 322 13.1% 280 13.1%
Other loans........... -- 0.3% -- 0.1% -- 0.2% -- 0.2%
----------- ----- ----------- ----- ----------- ----- ----------- -----
Total allocated....... 3,174 2,264 2,229 2,228
Unallocated........... 25,583 25,533 12,942 11,498
----------- ----------- ----------- -----------
Total................. $ 28,757 100.0% $ 27,797 100.0% $ 15,171 100.0% $ 13,726 100.0%
----------- ----- ----------- ----- ----------- ----- ----------- -----
----------- ----- ----------- ----- ----------- ----- ----------- -----
<CAPTION>
1993 1992
------------------------ ------------------------
% OF % OF
ALLOCATED CATEGORY TO ALLOCATED CATEGORY TO
RESERVES TOTAL LOANS RESERVES TOTAL LOANS
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Commercial............ $ 896 36.2% $ 1,445 37.0%
Consumer.............. 1,007 36.8% 915 35.6%
Real estate........... 23 13.9% 98 14.9%
Agricultural.......... 230 12.7% 315 12.2%
Other loans........... -- 0.4% -- 0.3%
----------- ----- ----------- -----
Total allocated....... 2,156 2,773
Unallocated........... 11,217 10,192
-----------
Total................. $ 13,373 100.0% $ 12,965 100.0%
----------- ----- ----------- -----
----------- ----- ----------- -----
</TABLE>
LIQUIDITY AND CASH FLOW
The objective of liquidity management is to maintain the Company's ability
to meet the day-to-day cash flow requirements of its customers who either wish
to withdraw funds or require funds to meet their credit needs. The Company must
manage its liquidity position to meet the needs of its customers, while
maintaining an appropriate balance between assets and liabilities to meet the
return on investment objectives of its stockholders. The Company monitors the
sources and uses of funds on a daily basis to maintain an acceptable liquidity
position, principally through deposit receipts and repayments; loan
originations, extensions and repayments; and management of investment
securities.
Net cash provided by operating activities, primarily representing net
interest income, totaled $18.2 million for the six months ended June 30, 1997,
$28.5 million for 1996, $27.7 million for 1995 and $15.9 million for 1994. Cash
used for investing activities totaled $87.5 million for the six months ended
June 30, 1997, $105.4 million for 1996, $79.1 million for 1995 and $92.8 million
for 1994. The funds used for investing activities primarily represent increases
in loans and investments in connection with acquisitions and internal growth for
each year reported.
Historically, the primary financing activity of the Company has been
deposits, retained earnings and borrowings. The Company's current liquidity
position is also supported by the management of its investment portfolio, which
provides a structured flow of maturing and reinvestable funds that could be
converted to cash, should the need arise. Maturing balances in the Company's
loan portfolio also provides options for cash flow management. The ability to
redeploy these funds is an important source of immediate to long-term liquidity.
Additional sources of liquidity include Federal funds lines, other borrowings
and access to the capital markets.
As a holding company, First Interstate is a corporation separate and apart
from the Banks, and therefore, provides for its own liquidity. Substantially all
of First Interstate's revenues are obtained from interest received and dividends
declared and paid by the Banks. As of June 30, 1997, the Banks had approximately
$14.0 million available to be paid as dividends to First Interstate. There are
statutory and regulatory provisions that could limit the ability of the Banks to
pay dividends to First Interstate. See "Regulation and Supervision." Management
of First Interstate believes that such restrictions will not have an impact on
the ability of First Interstate to meet its ongoing cash obligations, including
those relating to the Junior Subordinated Debentures. As of June 30, 1997, the
Company did not have any material commitments for capital expenditures.
In connection with the acquisition of the FIB Banks, the Company obtained a
revolving term loan and issued subordinated notes and shares of noncumulative
perpetual preferred stock. The revolving term loan bears interest at variable
rates (7.55% weighted average rate as of June 30, 1997) and was issued by a
syndicate of banks led by First Security Bank, N.A. The loan expires in December
2003, and is secured by all of the outstanding capital stock of the Banks. The
available borrowing amount under the loan is reduced by $2.0 million on a
semi-annual basis. The loan contains various restrictions dealing with, among
38
<PAGE>
other things, minimum capital ratios, the sale or issuance of capital stock and
the maximum amount of dividends. As of June 30, 1997, the amount outstanding
under the revolving term loan was $31.2 million, with an additional $8.8 million
in borrowing capacity available thereunder. The subordinated notes are held by
an institutional investor, bear interest at 7.5% per annum, are unsecured and
mature in increasing annual payments during the period from October 2002 to
October 2006. For additional information concerning the revolving term loan and
the subordinated notes, see Note 11 of the Notes to Consolidated Financial
Statements.
The noncumulative perpetual preferred stock consists of 20,000 outstanding
shares held by one institutional investor. The holder of the preferred stock is
entitled to receive, in any fiscal year, when and if declared by the Company's
Board of Directors, cash dividends at the rate of $85.30 per share through
September 2003, and thereafter at a variable rate equal to 250 basis points over
the high yield of the applicable U.S. Treasury Bill. Although the terms of the
preferred stock preclude redemptions prior to September 2003, the holder has
agreed to redemption, subject to regulatory approval, in connection with this
offering in exchange for a redemption premium of $500,000. For additional
information concerning the preferred stock, see Note 15 of the Notes to
Consolidated Financial Statements.
CAPITAL RESOURCES
Stockholders' equity increased 5.4% to $153.9 million as of June 30, 1997
from $146.1 million as of December 31, 1996. This increase resulted primarily
from an increase in retained earnings. Stockholders' equity increased 33.6% to
$146.1 million as of December 31, 1996 from $109.4 million as of December 31,
1995. This increase was due primarily to the issuance of the noncumulative
perpetual preferred stock, together with retained earnings. Stockholders' equity
is influenced primarily by earnings, dividends and, to a lesser extent, sales
and redemptions of common stock involving employees of the Company. For the six
months ended June 30, 1997 and the years ended December 31, 1996 and 1995, the
Company paid aggregate cash dividends to stockholders of $4.5 million, $6.5
million and $3.7 million, respectively.
A banking organization's total qualifying capital includes two components,
core capital (Tier 1 capital) and supplementary capital (Tier 2 capital). Core
capital, which must comprise at least half of total capital, includes common
stockholders' equity and qualifying perpetual preferred stock, less intangible
assets. Supplementary capital includes the allowance for loan losses (subject to
certain limitations), other perpetual preferred stock, certain other capital
instruments, and term subordinated debt.
As of December 31, 1996, the minimum risk-based capital requirements to be
considered adequately capitalized were 4.0% for core capital and 8.0% for total
capital. Federal banking regulators have also adopted leverage capital
guidelines to supplement risk-based measures. The leverage ratio is determined
by dividing Tier 1 capital as defined under the risk-based guidelines by average
total assets (not risk-adjusted) for the preceding quarter. The minimum leverage
ratio is 3.0% although banking organizations are expected to exceed that amount
by 1.0%, 2.0% or more, depending on their circumstances.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991, the Federal Reserve, the Comptroller of the Currency and the FDIC have
adopted regulations setting forth a five-tier system for measuring the capital
adequacy of the financial institutions they supervise. The capital levels of the
Company as of June 30, 1997 and the two highest levels recognized under these
regulations are set forth below.
<TABLE>
<CAPTION>
REGULATORY REQUIREMENTS
--------------------------------------
WELL ADEQUATELY
COMPANY CAPITALIZED CAPITALIZED
----------- --------------- ---------------------
<S> <C> <C> <C>
Tier 1 risk-based capital.................. 7.68% 6.00% 4.00%
Total risk-based capital................... 10.21% 10.00% 8.00%
Leverage ratio............................. 5.72% 5.00% 4.00%
</TABLE>
At June 30, 1997, the Company's risk-based capital ratios were 7.68% for
Tier 1 risk-based capital and 10.21% for total risk based capital, compared to
7.35% and 9.98% as of December 31, 1996, respectively.
39
<PAGE>
The Company's leverage ratio was 5.72% as of June 30, 1997, compared to 5.28% at
December 31, 1996. These ratios all met or exceeded the well-capitalized
guidelines shown above. In addition, at December 31, 1996, each of the Banks had
levels of capital which met or exceeded the well-capitalized guidelines. For
additional information concerning the capital levels of the Company, see Note 2
of the Notes to Consolidated Financial Statements.
The Company believes that the proceeds from this offering, together with
other available resources, will provide adequate capital to support anticipated
growth while allowing the Company to remain well-capitalized under applicable
regulations. However, should growth exceed expectations or in the event an
acquisition opportunity arises to expand market share, it may be necessary for
the Company to raise additional capital through the sale of either debt or
equity securities. It is anticipated that any such debt securities would
constitute Senior and Subordinated Debt.
INTEREST RATE RISK MANAGEMENT
Interest rate risk management is a function of the repricing characteristics
of the Company's portfolio of assets and liabilities. Interest rate risk
management focuses on the maturity structure of assets and liabilities and their
repricing characteristics during periods of changes in market interest rates.
Effective interest rate risk management seeks to ensure that both assets and
liabilities respond to changes in interest rates within an acceptable time
frame, thereby minimizing the effect of interest rate movements on net interest
income. Interest rate sensitivity is measured as the difference between the
volumes of assets and liabilities in the Company's current portfolio that are
subject to repricing at various time horizons: three months or less, three to
twelve months, one to five years, over five years and on a cumulative basis. The
differences are known as interest rate sensitivity gaps. The following table
shows interest rate sensitivity gaps for different intervals as of December 31,
1996.
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS ONE YEAR TO AFTER FIVE
OR LESS TO ONE YEAR FIVE YEARS YEARS TOTAL
------------- ------------- ----------- ---------- ------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS
Loans(1).................................. $ 497,593 $ 191,752 $ 535,595 $ 143,717 $ 1,368,657
Investment securities..................... 119,057 38,737 223,796 21,981 403,571
Interest-bearing deposit in bank.......... 6,545 -- -- -- 6,545
Federal funds sold........................ 4,945 -- -- -- 4,945
------------- ------------- ----------- ---------- ------------
Total interest-earning assets........... 628,140 230,489 759,391 165,698 1,783,718
------------- ------------- ----------- ---------- ------------
INTEREST-BEARING LIABILITIES(2)
Interest-bearing demand accounts.......... 316,964 -- -- -- 316,964
Savings deposits.......................... 396,845 -- -- -- 396,845
Time deposits, $100 or more............... 40,819 24,792 43,839 12,792 122,242
Other time deposits....................... 205,859 86,868 164,658 617 458,002
Federal funds purchased................... 13,450 -- -- -- 13,450
Securities sold under repurchase
agreements.............................. 129,137 -- -- -- 129,137
Other borrowed funds...................... 13,071 -- -- -- 13,071
Long-term debt............................ 16,726 22,960 710 24,271 64,667
------------- ------------- ----------- ---------- ------------
Total interest-bearing liabilities...... 1,132,871 134,620 209,207 37,680 1,514,378
------------- ------------- ----------- ---------- ------------
Rate gap.................................... $ (504,731) $ 95,869 $ 550,184 $ 128,018 $ 269,340
Cumulative rate gap......................... $ (504,731) $ (408,862) $ 141,322 $ 269,340
Cumulative rate gap as a percentage of total
interest-earning assets................... (28.2)% (22.8)% 7.9% 15.1%
</TABLE>
- ------------------------
(1) Does not include non-accrual loans of $6,822.
(2) Does not include non-interest bearing demand deposits of $385,371.
40
<PAGE>
The foregoing table demonstrates that, as of December 31, 1996, the Company
had (i) a negative three month gap of $504.7 million or 28.2% of total
interest-earning assets, and (ii) a negative cumulative one year gap of $408.9
million or 22.8% of total interest-earning assets. As of June 30, 1997, the
Company had (i) a negative three month gap of $349.1 million or 18.5% of total
interest-earning assets, and (ii) a negative cumulative one year gap of $393.1
million or 20.8% of total interest-earning assets. In theory, this would
indicate that at June 30, 1997, $393.1 million more in liabilities than assets
would reprice if there was a change in interest rates over the next year. If
interest rates were to increase, the negative gap would tend to result in a
lower net interest margin. However, changes in the mix of earning assets or
supporting liabilities can either increase or decrease the net interest margin
without affecting interest rate sensitivity. In addition, the interest rate
spread between an asset and its supporting liability can remain the same, thus
impacting net interest income. This characteristic is referred to as a basis
risk and, generally, relates to the repricing characteristics of short-term
funding sources such as certificates of deposit.
Varying interest rate environments can create unexpected changes in
prepayment levels of assets and liabilities which are not reflected in the
interest sensitivity analysis table. These prepayments may have significant
effects on the Company's net interest margin. Because of these factors, an
interest sensitivity gap report may not provide a complete assessment of the
Company's exposure to changes in interest rates. Moreover, management believes
that notwithstanding the Company's negative gap position, which would indicate
that net interest margin would decline when rates rise, the Company's net
interest margin actually increases during rising rate periods due to the basis
risk applicable to the Company's interest-bearing liabilities.
Given the limitations associated with gap sensitivity analysis, the Company
also evaluates the impact of fluctuations in interest rates on net interest
margin through income statement simulation models and other analyses that
include various assumptions regarding the repricing relationship of assets and
liabilities, as well as anticipated changes in loan and deposit volumes over
differing rate environments. The Company attempts to maintain a mix of interest
earning assets and deposits such that no more than 5% of the net interest margin
will be at risk should interest rates vary one percent. However, there can be no
assurance as to the actual effect changes in interest rates will have on the
Company's net interest margin.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 1996, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishment of Liabilities."
This statement provides accounting and reporting standards for transfers and
servicing of financial assets and extinguishment of liabilities. The provisions
of SFAS No. 125 apply to transactions occurring after December 31, 1996. This
adoption has not had a material effect on the consolidated financial position or
results of operations of the Company.
In February 1997, the FASB issued SFAS No. 128, "Earnings per Share." This
statement simplifies the standards for computing earnings per share ("EPS") and
replaces the presentation of primary and fully diluted EPS with a presentation
of basic and fully diluted EPS on the face of the income statement for all
entities with complex capital structures. The provisions of SFAS No. 128 apply
to financial statements issued for periods ending after December 15, 1997.
Earlier adoption is not permitted. Management expects that adoption will not
have a material effect on the reported EPS of the Company.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income," which establishes standards for reporting and displaying comprehensive
income and its components (revenues, expenses, gains and losses) in a full set
of general-purpose financial statements. This statement requires that all items
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. SFAS No. 130 is effective for
fiscal years beginning after December 15, 1997. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
Management expects that adoption will not have a material effect on the
consolidated financial position or results of operations of the Company.
41
<PAGE>
BUSINESS
THE COMPANY
First Interstate is a bank holding company which operates 31 banking offices
in 23 communities throughout Montana and Wyoming through the Banks. The
Company's headquarters are located in Billings, Montana. At June 30, 1997, the
Company had assets of $2.1 billion, deposits of $1.7 billion and total
stockholders' equity of $153.9 million, making it the largest independent
banking organization headquartered in Montana or Wyoming.
As a holding company, First Interstate functions as a service organization
for each of the Banks. The Company provides general corporate guidance and
specialized services to the Banks through a wide range of banking and operating
policies and activities. These services include data processing, credit
administration, auditing, asset/liability management, investment analysis, human
resource management, marketing and planning coordination.
The Company is the licensee under a trademark license agreement between
Wells Fargo & Company and the Company granting it an exclusive, nontransferable
license to use the "First Interstate" name and logo in the states of Montana and
Wyoming with additional rights in selected other states.
The Company was incorporated in Montana in 1971, and in October 1997 changed
its name from "First Interstate BancSystem of Montana, Inc." to "First
Interstate BancSystem, Inc." The Company maintains its principal executive
offices at 401 North 31st Street, Billings, Montana 59101 and its telephone
number is (406) 255-5300.
COMMUNITY BANKING PHILOSOPHY
The Company's banking offices are located in communities with populations
generally ranging from approximately 5,000 to 70,000 people, but serve market
areas with greater populations because of the limited number of financial
institutions within a reasonable distance from the communities in which such
offices are located. The Company believes that these communities provide a
stable core deposit and funding base, as well as economic diversification across
a number of industries, including agriculture, energy, mining, timber
processing, tourism, government services, education and medical services.
The banking industry is presently undergoing change with respect to
regulatory matters, consolidation, changing consumer needs and economic and
market conditions. The Company believes that it can best address this changing
environment through its "Strategic Vision." Through the Strategic Vision, the
Company emphasizes providing its customers full service commercial and consumer
banking at a local level using a personalized service approach, while serving
and strengthening the communities in which the Banks are located through
community service activities.
The Company grants significant autonomy and flexibility to the Banks in
delivering and pricing products at the local level in response to market
considerations and customer needs. This flexibility and autonomy enables the
Banks to remain competitive and enhances the relationships between the Banks and
the customers they serve. The Company also emphasizes accountability, however,
by establishing performance and incentive standards for the Banks which are tied
to net income at the individual branch level. The Company believes that this
combination of autonomy and accountability allows the Banks to provide a high
level of personalized service to customers while remaining attentive to
financial performance.
GROWTH STRATEGY
The Company's growth strategy includes growing internally and expanding into
new and complementary markets when appropriate opportunities arise. The Company
believes it has in place an infrastructure that will allow for growth and yield
economies of scale on a going forward basis. The Company is pursuing
42
<PAGE>
regulatory approval to open several new branch offices in Montana and Wyoming.
The Company believes that it will continue to expand its presence in the Montana
and Wyoming markets.
INTERNAL GROWTH
The Company's internal growth strategy is to attract and retain customers by
providing personalized "high touch" service, increasing its offering of products
and services and cross-selling existing products and services. The Company
believes its ability to offer a complete package of consumer and commercial
banking products and services enhances First Interstate's image as a "one-stop"
banking organization. The Company creates awareness of its products and services
through various marketing and promotional efforts, including involvement in
community activities.
EXTERNAL GROWTH
The Company has grown in recent years by selectively acquiring banks in
additional markets in Montana and Wyoming. Since September 1996, the Company has
acquired FIB Whitefish and the FIB Banks. The Company considers acquisitions
which will enhance its existing position within a market, expand its presence
into complementary markets, or add capabilities or personnel that will enhance
the Company as a whole. The Company has a selective acquisition strategy in that
it principally considers those institutions with strong financial and managerial
resources already in place.
THE BANKS
The Company, through the Banks, delivers a comprehensive range of consumer
and commercial banking services to individual and business customers. These
services include personal and business checking and savings accounts, time
deposits, individual retirement accounts, cash management, trust services and
commercial, consumer, real estate, agriculture and other loans.
FIB Montana, a Montana chartered bank organized in 1916, has 20 banking
offices in 14 Montana communities, including Billings, Bozeman, Colstrip, Cut
Bank, Eureka, Evergreen, Gardiner, Great Falls, Hardin, Kalispell, Livingston,
Miles City, Missoula and Whitefish. These communities are home to a variety of
industries, including agriculture, mining, energy, timber processing, tourism,
government services, education and medical services, with a significant number
of small to medium sized businesses. As of June 30, 1997, FIB Montana held
assets and deposits totaling $1.4 billion and $1.1 billion, respectively. FIB
Montana is the largest independent bank headquartered in Montana. The Bank's
main office is located in Billings, Montana.
FIB Wyoming, a Wyoming chartered bank organized in 1893, has ten banking
offices in eight Wyoming communities, including Buffalo, Casper, Gillette,
Greybull, Lander, Laramie, Riverton and Sheridan. These communities are home to
a variety of industries, including energy, agriculture, mining, tourism,
government services, education and medical services with a significant number of
small to medium sized businesses. As of June 30, 1997, FIB Wyoming held assets
and deposits totaling $701.1 million and $601.4 million, respectively. The
Bank's main office is located in Sheridan, Wyoming.
First Interstate, fsb, a federally chartered savings bank, was opened as a
de novo federal savings bank in December 1996, and currently has one banking
office in Hamilton, Montana. The Company expects to merge First Interstate, fsb
with and into FIB Montana in the fourth quarter of 1997, subject to regulatory
approval. Following the merger, the Company expects that FIB Montana will
continue operating the First Interstate, fsb office in Hamilton, Montana as a
branch office and that the Company will deregister as a savings and loan holding
company. The Company believes that this merger will not materially alter the
Company's ongoing operations. As of June 30, 1997, First Interstate, fsb held
assets and deposits totaling $3.8 million and $1.9 million, respectively.
43
<PAGE>
ADMINISTRATION OF THE BANKS
Each of the Banks and their respective branches operate with a significant
level of autonomy and are responsible for day-to-day operations, the pricing of
loans and deposits, lending decisions and community relations. The Company also
emphasizes accountability, however, by establishing performance and incentive
standards for the Banks which are tied to net income at the individual branch
level. The Company provides general oversight and centralized services for the
Banks to enable them to serve their markets more effectively. These services
include data processing, credit administration, auditing, asset/liability
management, investment analysis, human resources management, marketing and
planning coordination. The Company continues to emphasize corporate
administration of functions which assist the Banks and their branches in more
effectively focusing on their respective markets and customers. Key among those
functions are the following:
DATA PROCESSING
The Company provides most of its and the Banks' data processing
requirements. These services, including general ledger, investment securities
management and loan and deposit processing, are performed through the use of
computer hardware which First Interstate owns and maintains and software which
it licenses. First Interstate also operates an extensive ATM network for the
benefit of the Banks' customers.
CREDIT ADMINISTRATION
The Company has established comprehensive credit policies which guide the
Banks' lending activities. These policies establish system-wide standards and
assist Bank management in the lending process. On the local level, the Banks are
granted significant autonomy and flexibility with respect to credit pricing
issues and lending decisions.
FINANCIAL AND ACCOUNTING
The Company provides all accounting services for the Banks, including
general ledger administration, internal and external reporting, asset/liability
management and investment portfolio analysis. In addition, the Company has
established policies regarding capital expenditures, asset/liability management
and capital management.
SUPPORT SERVICES
The Company provides the Banks with legal and compliance services, internal
auditing services, marketing services, planning coordination, personnel and
staffing support and various other services. The Company believes the
centralization of these services yields economies of scale, increases the
efficiency of the Banks and allows management of the Banks' branches to focus on
serving their market areas and customers.
LENDING ACTIVITIES
The Banks offer short and long-term commercial, consumer, real estate,
agricultural and other loans to individuals and small to medium sized businesses
in each of their market areas. The lending activities of the Banks and their
branches are guided by the Company's comprehensive lending and credit
guidelines. The Company believes that it is important to keep the credit
decision at the local branch level in order to enhance the speed and efficiency
with which the customer is served. While each loan must meet minimum
underwriting standards established in the Company's lending policy, lending
officers are granted certain levels of autonomy in approving and pricing loans.
The Company-established credit policies are intended to maximize the quality and
mix of loans, while also assuring that the Banks and their branches are
responsive to competitive issues and community needs in each market area. The
credit policies establish
44
<PAGE>
specific lending authorities to Bank officers, reflecting their individual
experience and level of authority, type of loan and collateral, and thresholds
at which loan requests must be approved at a committee level.
The Company oversees the lending activities of the Banks and is responsible
for monitoring general lending activities. Areas of oversight include the types
of loans, the mix of variable and fixed rate loans, delinquencies,
non-performing assets, classified loans and other credit information to evaluate
the risk within each Bank's loan portfolio and to recommend general reserve
percentages and specific reserve allocations.
The Company's loan portfolio is diversified across commercial, consumer,
real estate, agricultural and other loans, with a mix of fixed and variable rate
loans. Individual branches are granted autonomy with respect to product pricing,
which is significantly influenced by the markets in which the particular
branches are located.
COMMERCIAL LOANS
The Banks provide a mix of variable and fixed rate commercial loans. The
loans are typically made to small to medium sized manufacturing, wholesale,
retail and service businesses for working capital needs and business expansions.
As of June 30, 1997, 35.6% of the Company's loan portfolio was composed of
commercial loans. Commercial loans generally include lines of credit and loans
with maturities of five years or less. The loans are generally made with the
business operations as the primary source of repayment, but also include
collateralization by inventory, accounts receivable, equipment, real estate and/
or personal guarantees.
Unlike residential mortgage loans and consumer installment loans, which
generally are made on the basis of the borrower's ability to make repayment from
his or her employment and other income and which are secured by real property
whose value tends to be more easily ascertainable, commercial business loans
involve different risks and are typically made on the basis of the borrower's
ability to make repayment from the cash flow of the borrower's business. As a
result, the availability of funds for the repayment of commercial business loans
may be substantially dependent on the success of the business itself. Further,
the collateral securing the loans may depreciate over time, may be difficult to
appraise and may fluctuate in value based on the success of the business. The
Company attempts to limit these risks by employing underwriting and
documentation standards contained in written loan policies and procedures. These
policies and procedures are reviewed on an ongoing basis by management and
adherence to stated policies are monitored by credit administration.
CONSUMER LOANS
The Banks' consumer loans include personal automobile loans, home
improvement loans and equity lines of credit. The consumer loans are generally
secured by automobiles, boats and other types of personal property and are made
on an installment basis. The equity lines of credit are generally floating rate,
are reviewed annually and are secured by residential real estate. Over
two-thirds of the Company's consumer loans are indirect dealer paper which is
created when the Company advances money to dealers of consumer products who in
turn lend such money to consumers purchasing automobiles, boats and other
consumer goods. As of June 30, 1997, 34.1% of the Company's loan portfolio was
composed of consumer and personal loans.
REAL ESTATE LOANS
The Banks provide interim and permanent financing for both single-family and
multi-unit properties and medium term loans for commercial and industrial
buildings. The Banks originate variable and fixed rate real estate mortgages,
generally in accordance with the guidelines of the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation. Loans originated in
accordance with these guidelines are referred to as "conforming loans" and loans
which do not meet these standards are
45
<PAGE>
referred to as "non-conforming loans." The Company sells all conforming loans in
the secondary market, but generally retains its non-conforming loans. Real
estate loans are typically secured by first liens on the financed property. As
of June 30, 1997, 18.7% of the Company's loan portfolio was composed of real
estate loans, many of which are fixed rate loans, with maturities generally less
than 15 years.
AGRICULTURAL LOANS
Agricultural loans generally consist of short and medium-term loans and
lines of credit and are made to the large base of farm and ranch operations in
the Company's market areas. The Banks make agricultural loans in many of the
communities they serve, which are generally used for crops, livestock, buildings
and equipment, and general operating purposes. Agricultural loans are generally
secured by assets such as livestock or equipment and are repaid from the
operations of the farm or ranch. As of June 30, 1997, 11.3% of the Company's
loan portfolio was composed of agricultural loans. Agricultural loans generally
have maturities of five years or less, with operating lines lasting for one
production season.
DEPOSITS
Each of the Banks offers usual and customary depository products provided by
commercial banks, including personal and business checking accounts, savings
accounts and time deposits (including IRAs). Deposits at the Banks are insured
by the FDIC up to statutory limits. Local branch management is given relative
autonomy in determining the type, mix and pricing of the depository products
offered to customers, in an attempt to best compete in each Bank's particular
market, with corporate standards established at the Company level to determine
general guidelines and pricing. As of June 30, 1997, approximately 38.1%, 24.5%
and 37.4% of the Company's deposits consisted of demand, savings and time
deposits, respectively. The Company also has a significant number of repurchase
agreements primarily with commercial depositors. Under the repurchase
agreements, the Company sells, but does not transfer on its books or otherwise,
investment securities held by the Company to a customer under an agreement to
repurchase the investment security at a specified time or on demand.
OTHER OPERATIONS
In addition to the services mentioned above, the Company offers safe deposit
boxes, night depository services and wire transfers, among other things. The
Company also operates a substantial data processing division that performs data
processing services for the Banks and 35 non-affiliated financial institutions
in Montana, Wyoming and Idaho. The Company also provides support for over 540
ATM locations in 12 states, principally in Montana, Wyoming, Idaho, Colorado and
North Dakota.
The Company, through the Banks, offers a full range of fee-based trust
services to its individual, non-profit and corporate clients, including
corporate pension plans, individual retirements plans and 401(k) plans. Total
assets under management by the Company's trust operations totaled $565.0 million
at June 30, 1997.
COMPETITION
The banking and financial services business in both Montana and Wyoming is
highly competitive. The Banks compete for loans, deposits and customers for
financial services with other commercial banks, savings and loan associations,
securities and brokerage companies, mortgage companies, insurance companies,
finance companies, money market funds, credit unions and other nonbank financial
service providers. The Company competes in its markets on the basis of its
Strategic Vision philosophy, timely and responsive customer service and general
market presence. Several of the Company's competitors are much larger in total
assets and capitalization, have greater access to capital markets and offer a
broader array of financial services than the Banks. Moreover, the Banking and
Branching Act has increased competition in the Banks' markets, particularly from
larger, multi-state banks. See "Regulation and Supervision." The
46
<PAGE>
Company competes with several large, multi-state banks as well as numerous
smaller community banks. Principal competitors include Norwest Corporation, U.S.
Bancorp and Community First Bankshares, Inc. With respect to core deposits, the
Company believes it ranks second in market share to all other competitors in
each of Montana and Wyoming. See "Risk Factors--Competition."
PROPERTIES
The Company is the anchor tenant in a commercial building in which the
Company's principal executive offices are located in Billings, Montana. The
building is owned by a joint venture partnership in which FIB Montana is one of
the two partners, owning a 50% interest in the partnership. The Company and FIB
Montana lease space for operations in the building. The Company also leases
buildings in which five branches are located. All other branches are located in
Company-owned facilities. The Company believes its leased and owned facilities
are adequate for its present needs and anticipates future growth. See also Note
6 and Note 13 of the Notes to Consolidated Financial Statements.
EMPLOYEES
The Company employed approximately 950 full-time and 225 part-time employees
as of June 30, 1997. None of the Company's employees are covered by a collective
bargaining agreement. The Company considers its employee relations to be good.
LEGAL PROCEEDINGS
In the normal course of business, the Banks are named or threatened to be
named as defendants in various lawsuits. In the opinion of management, following
consultation with legal counsel, the pending lawsuits are without merit or, in
the event the plaintiff prevails, the ultimate liability or disposition thereof
will not have a material adverse effect on the Company's business, financial
condition or results of operations.
REGULATION AND SUPERVISION
Bank holding companies, commercial banks and savings banks are subject to
extensive regulation under both federal and state law. See "Risk
Factors--Government Regulation and Monetary Policy." Set forth below is a
summary description of certain laws which relate to the regulation of First
Interstate and the Banks. The description does not purport to be complete and is
qualified in its entirety by reference to the applicable laws and regulations.
FIRST INTERSTATE
As a bank holding company, First Interstate is subject to regulation under
the Bank Holding Company Act of 1956, as amended (the "BHCA"), and to
supervision and regulation by the Federal Reserve. First Interstate is also
subject to certain provisions of the Savings and Loan Holding Company Act (the
"SLHCA"), now codified under the Home Owner Loan Act of 1933, as amended (the
"HOLA").
The Federal Reserve may require that First Interstate terminate an activity
or terminate control of or liquidate or divest certain Banks if the Federal
Reserve believes such activity or control constitutes a significant risk to the
financial safety, soundness or stability of any of the Banks or is in violation
of the BHCA. The Federal Reserve also has the authority to regulate provisions
of certain bank holding company debt, including authority to impose interest
ceilings and reserve requirements on such debt. Under certain circumstances,
First Interstate must file written notice and obtain approval from the Federal
Reserve prior to purchasing or redeeming its equity securities, as is required
with respect to redemption of the Company's noncumulative perpetual preferred
stock. Further, First Interstate is required by the Federal Reserve to maintain
certain levels of capital. See "--Capital Standards" herein.
47
<PAGE>
First Interstate is required to obtain the prior approval of the Federal
Reserve for the acquisition of 5% or more of the outstanding shares of any class
of voting securities or substantially all of the assets of any bank or bank
holding company. Prior approval of the Federal Reserve is also required for the
merger or consolidation of First Interstate and another bank holding company.
First Interstate is prohibited by the BHCA, except in certain statutorily
prescribed instances, from acquiring direct or indirect ownership or control of
5% or more of the outstanding voting shares of any company that is not a bank or
bank holding company and from engaging directly or indirectly in activities
other than those of banking, managing or controlling banks or furnishing
services to its subsidiaries. However, First Interstate, subject to the prior
approval of the Federal Reserve, may engage in, or acquire shares of companies
engaged in, activities that are deemed by the Federal Reserve to be so closely
related to banking or managing or controlling banks as to be a proper incident
thereto. In making any such determination, the Federal Reserve may consider,
among other things, whether the performance of such activities by First
Interstate or an affiliate can reasonably be expected to produce benefits to the
public, such as greater convenience, increased competition or gains in
efficiency, that outweigh possible adverse effects, such as undue concentration
of resources, decreased or unfair competition, conflicts of interest or unsound
banking practices. The Federal Reserve is also empowered to differentiate
between activities commenced de novo and activities commenced by acquisition, in
whole or in part, of a going concern. On September 30, 1996, the Economic Growth
and Regulatory Paperwork Reduction Act of 1996 (the "1996 Budget Act")
eliminated the requirement that bank holding companies seek Federal Reserve
approval before engaging de novo in permissible nonbanking activities listed in
Regulation Y, which governs bank holding companies, if the holding company and
its lead depository institution are well-managed and Well-Capitalized (as
defined herein) and certain other criteria specified in the statute are met. For
purposes of determining the capital levels at which a bank holding company is
considered "Well-Capitalized" under the Budget Act and Regulation Y, the Federal
Reserve adopted, as a rule, risk-based capital ratios (on a consolidated basis)
that are the same as the levels set for determining that a state member bank is
Well Capitalized under the provisions established under the prompt corrective
action provisions of federal law. See "--Prompt Corrective Action and Other
Enforcement Mechanisms" herein.
Under Federal Reserve regulations, a bank holding company is required to
serve as a source of financial and managerial strength to its subsidiary banks
and may not conduct its operations in an unsafe or unsound manner. In addition,
it is the Federal Reserve's policy that in serving as a source of strength to
its subsidiary banks, a bank holding company should stand ready to use available
resources to provide adequate capital funds to its subsidiary banks during
periods of financial stress or adversity and should maintain the financial
flexibility and capital-raising capacity to obtain additional resources for
assisting its subsidiary banks. A bank holding company's failure to meet its
obligations to serve as a source of strength to its subsidiary banks will
generally be considered by the Federal Reserve to be an unsafe and unsound
banking practice or a violation of the Federal Reserve's regulations or both.
The Company registered as a savings and loan holding company under the SLHCA
in connection with the formation of First Interstate, fsb. Amendments to the
SLHCA in 1996 have generally exempted bank holding companies from substantially
all of the requirements of the SLHCA. However, the Company is subject to certain
limitations on its activities under the SLHCA and Office of Thrift Supervision
(the "OTS") regulations by reason of its control of First Interstate, fsb. These
limitations are generally less restrictive than those applicable to the Company
under the BHCA and Federal Reserve regulations.
Upon merger of First Interstate, fsb with and into FIB Montana, the Company
will cease to be subject to the SLHCA and the HOLA.
THE BANKS
FIB Montana is subject to the supervision of and regular examination by, the
Federal Reserve and the State of Montana. FIB Wyoming is subject to the
supervision of and regular examination by, the FDIC and the State of Wyoming.
First Interstate, fsb, as a federally chartered savings bank, is subject to the
48
<PAGE>
supervision of and regular examination by, the OTS. If any of the foregoing
regulatory agencies determine that the financial condition, capital resources,
asset quality, earning prospects, management, liquidity or other aspects of a
Bank's operations are unsatisfactory or that the Bank or its management is
violating or has violated any law or regulation, various remedies are available
to such agencies. These remedies include the power to enjoin "unsafe or unsound"
practices, to require affirmative action to correct any conditions resulting
from any violation or practice, to issue an administrative order that can be
judicially enforced, to direct an increase in capital, to restrict the growth of
the Bank, to assess civil monetary penalties, to remove officers and directors
and ultimately to terminate a Bank's deposit insurance, which would result in a
revocation of the Bank's charter. None of the Banks has been the subject of any
such actions by their respective regulatory agencies.
The FDIC insures the deposits of the Banks in the manner and to the extent
provided by law. For this protection, the Banks pay a semiannual statutory
assessment. See "--Premiums for Deposit Insurance" herein.
Various requirements and restrictions under the laws of the states of
Montana and Wyoming and the United States affect the operations of the Banks.
State and federal statutes and regulations relate to many aspects of the Banks'
operations, including levels of capital, reserves against deposits, interest
rates payable on deposits, loans, investments, mergers and acquisitions,
borrowings, dividends, locations of branch offices and capital requirements.
RESTRICTIONS ON TRANSFERS OF FUNDS TO FIRST INTERSTATE AND THE BANKS
First Interstate is a legal entity separate and distinct from the Banks.
Statutory and regulatory limitations exist with respect to the amount of
dividends which may be paid to First Interstate by the Banks. Under Montana
banking law, FIB Montana may not declare dividends in any one calendar year in
excess of its net earnings of the preceding two years without giving notice to
the Montana Commissioner of Banking and Financial Institutions. As a Federal
Reserve member bank, FIB Montana may not, without the consent of the Federal
Reserve, declare dividends in a calendar year which, when aggregated with prior
dividends in that calendar year, exceed the calendar year net profits of FIB
Montana together with retained earnings for the prior two calendar years. Under
Wyoming banking law, FIB Wyoming may not, without the approval of the Wyoming
Banking Commissioner, declare dividends in any one calendar year in excess of
its net profits in the current year combined with retained net profits of the
preceding two years, less any required transfers to surplus or a fund for the
retirement of any preferred stock. In addition, there are restrictions under the
Company's debt instruments which prohibit dividends in certain circumstances.
The bank regulatory agencies also have authority to prohibit the Banks from
engaging in activities that, in their respective opinions, constitute unsafe or
unsound practices in conducting their business. It is possible, depending upon
the financial condition of the Bank in question and other factors, that the bank
regulatory agencies could assert that the payment of dividends or other payments
might, under some circumstances, be an unsafe or unsound practice. Further, the
bank regulatory agencies have established guidelines with respect to the
maintenance of appropriate levels of capital by banks or bank holding companies
under their jurisdiction. Compliance with the standards set forth in such
guidelines and the restrictions that are or may be imposed under the prompt
corrective action provisions of federal law could limit the amount of dividends
which the Banks or First Interstate may pay. See "--Prompt Corrective Action and
Other Enforcement Mechanisms" and "--Capital Standards" herein for a discussion
of these additional restrictions on capital distributions.
A large portion of First Interstate's revenues, including funds available
for the payment of interest on the Junior Subordinated Debentures, dividends and
operating expenses, are and will continue to be, dividends paid by the Banks.
The Banks are also subject to certain restrictions imposed by federal law on
any extensions of credit to, or the issuance of a guarantee or letter of credit
on behalf of, First Interstate or any affiliate of First Interstate, the
purchase of or investments in stock or other securities thereof, the taking of
such securities
49
<PAGE>
as collateral for loans and the purchase of assets of First Interstate or the
Banks. Such restrictions prevent First Interstate and the Banks from borrowing
from the Banks unless the loans are secured by marketable obligations or other
acceptable collateral of designated amounts. Further, such secured loans and
investments by the Banks to or in First Interstate are limited to 10% of the
respective Bank's capital stock and surplus (as defined by federal regulations)
and such secured loans and investments are limited, in the aggregate, to 20% of
the respective Bank's capital stock and surplus (as defined by federal
regulations). Additional restrictions on transactions with Banks may be imposed
on the Banks by state or federal regulations including under the prompt
corrective action provisions of federal law. See "--Prompt Corrective Action and
Other Enforcement Mechanisms" herein.
COMMON LIABILITY
Under federal law, a depository institution insured by the FDIC can be held
liable for any loss incurred by, or reasonably expected to be incurred by, the
FDIC in connection with the default of a commonly controlled FDIC-insured
depository institution or any assistance provided by the FDIC to a commonly
controlled FDIC-insured institution in danger of default. These provisions can
have the effect of making one Bank responsible for FDIC-insured losses at
another Bank.
EFFECT OF GOVERNMENT POLICIES AND LEGISLATION
Banking is a business that depends on rate differentials. In general, the
difference between the interest rate paid by the Banks on their deposits and
their other borrowings and the interest rate received by the Banks on loans
extended to their customers and on investment securities comprises a major
portion of the Banks' earnings. These rates are highly sensitive to many factors
that are beyond the control of the Banks. Accordingly, the earnings and
potential growth of the Banks are subject to the influence of domestic and
foreign economic conditions, including inflation, recession and unemployment.
The commercial banking business is not only affected by general economic
conditions but is also influenced by the monetary and fiscal policies of the
federal government and the policies of regulatory agencies, particularly the
Federal Reserve. The Federal Reserve implements national monetary policies (with
objectives such as curbing inflation and combating recession) by its open-market
operations in United States government securities, by adjusting the required
level of reserves for financial institutions subject to the Federal Reserve's
reserve requirements and by varying the discount rates applicable to borrowings
by depository institutions. The actions of the Federal Reserve in these areas
influence the growth of bank loans, investments and deposits and also affect
interest rates charged on loans and paid on deposits. The nature and impact of
any future changes in monetary policies cannot be predicted.
From time to time, legislation is enacted which has the effect of increasing
the cost of doing business, limiting or expanding permissible activities or
affecting the competitive balance between banks and other financial service
providers. Proposals to change the laws and regulations governing the operations
and taxation of banks, bank holding companies and other financial service
providers are frequently made in Congress, in the Montana and Wyoming
legislatures and before various bank regulatory and other professional agencies.
The likelihood of any major legislative changes and the impact such changes
might have on First Interstate or the Banks are impossible to predict.
CAPITAL STANDARDS
The Federal Reserve and the FDIC have adopted risk-based minimum capital
guidelines intended to provide a measure of capital that reflects the degree of
risk associated with a banking organization's operations for transactions
reported on the balance sheet as both assets and transactions, such as letters
of credit and recourse arrangements. Under these guidelines, nominal dollar
amounts of assets and credit equivalent amounts of off-balance sheet items are
multiplied by one of several risk adjustment percentages, which range from 0%
for assets with low credit risk, such as certain U.S. Treasury securities, to
100% for assets with high credit risk, such as commercial loans.
50
<PAGE>
A banking organization's risk-based capital ratios are obtained by dividing
its qualifying capital by its total risk-adjusted assets. The regulators measure
risk-adjusted assets, which include off-balance sheet items, against both total
qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2
capital (both as defined herein)) and Tier 1 capital. "Tier 1 capital" consists
of, among other things, (i) common stockholders' equity capital (including
common stock and related surplus and undivided profits); (ii) noncumulative
perpetual preferred stock (cumulative perpetual preferred stock for bank holding
companies), including any related surplus; and (iii) minority interests in
certain subsidiaries, less most intangible assets. "Tier 2 capital" may consist
of: (i) a limited amount of allowance for loan and lease losses ("ALLL"); (ii)
cumulative perpetual preferred stock; (iii) perpetual preferred stock, including
any related surplus; (iv) term subordinated debt and certain other instruments
with some characteristics of equity. The inclusion of elements of Tier 2 capital
is subject to certain other requirements and limitations of the federal banking
agencies. The federal banking agencies require a minimum ratio of qualifying
total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1
capital to risk-adjusted assets of 4%.
In addition to the risked-based guidelines, federal banking regulators
require banking organizations to maintain a minimum amount of Tier 1 capital to
total assets, referred to as the "leverage ratio." For a banking organization
rated in the highest of the five categories used by regulators to rate banking
organizations, the minimum leverage ratio of Tier 1 capital to total assets must
be at least 5%. See "--Prompt Corrective Action and Other Enforcement
Mechanisms." In addition to the uniform risk-based capital guidelines and
leverage ratios that apply across the industry, the regulators have the
discretion to set individual minimum capital requirements for specific
institutions at rates significantly above the minimum guidelines and ratios.
First Interstate and the Bank are all rated as Well Capitalized (as defined
below).
In June 1996, the federal banking agencies adopted a joint agency policy
statement to provide guidance on managing interest rate risk. These agencies
indicated that the adequacy and effectiveness of a bank's interest rate risk
management process and the level of its interest rate exposures are critical
factors in the agencies' evaluation of the bank's capital adequacy. A bank with
material weaknesses in its risk management process or high levels of exposure
relative to its capital will be directed by the agencies to take corrective
action. Such actions will include recommendations or directions to raise
additional capital, strengthen management expertise, improve management
information and measurement systems, reduce levels of exposure, or some
combination thereof depending upon the individual institution's circumstances.
This policy statement augments the August 1995 regulations adopted by the
federal banking agencies which addressed risk-based capital standards for
interest rate risk.
In December 1993, the federal banking agencies issued an interagency policy
statement on the ALLL which, among other things, established certain benchmark
ratios of loan loss reserves to classified assets. The benchmark set forth by
such policy statement is the sum of (a) assets classified loss; (b) 50% of
assets classified doubtful; (c) 15% of assets classified substandard; and (d)
estimated credit losses on other assets over the upcoming 12 months. This amount
is neither a "floor" nor a "safe harbor" level for an institution's ALLL.
Federally supervised banks and savings associations are currently required
to report deferred tax assets in accordance with SFAS No. 109. The federal
banking agencies issued final rules governing banks and bank holding companies,
which became effective April 1, 1995 and which limit the amount of deferred tax
assets that are allowable in computing an institution's regulatory capital.
Deferred tax assets that can be realized for taxes paid in prior carryback years
and from future reversals of existing taxable temporary differences are
generally not limited. Deferred tax assets that can only be realized through
future taxable earnings are limited for regulatory capital purposes to the
lesser of (i) the amount that can be realized within one year of the quarter-end
report date, based on projected taxable income for that year or (ii) 10% of Tier
1 capital. The amount of any deferred tax in excess of this limit would be
excluded from Tier 1 capital and total assets and regulatory capital
calculations.
51
<PAGE>
Future changes in regulations or practices could further reduce the amount
of capital recognized for purposes of capital adequacy. Such a change could
affect the ability of the Banks to grow and could restrict the amount of
profits, if any, available for the payment of dividends. For information
concerning the capital ratios of First Interstate, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Financial
Condition--Capital Resources."
PROMPT CORRECTIVE ACTION AND OTHER ENFORCEMENT MECHANISMS
Federal law requires each federal banking agency to take prompt corrective
action to resolve problems of insured depository institutions, including,
without limitation, those institutions which fall below one or more prescribed
minimum capital ratios. In accordance with federal law, each federal banking
agency has promulgated regulations defining five categories in which an insured
depository institution will be placed, based on the level of its capital ratios.
The five categories are "Well Capitalized," "Adequately Capitalized,"
"Undercapitalized," "Significantly Undercapitalized" and "Critically
Undercapitalized." An insured depository institution will be classified in the
following categories based, in part, on the capital measures indicated below:
<TABLE>
<CAPTION>
WELL CAPITALIZED ADEQUATELY CAPITALIZED
<S> <C>
Total risk-based capital of at least Total risk-based capital of at least
10%; 8%;
Tier 1 risk-based capital of 6%; and Tier 1 risk-based capital of 4%; and
Leverage ratio of 5%. Leverage ratio of 4%.
UNDERCAPITALIZED SIGNIFICANTLY UNDERCAPITALIZED
Total risk-based capital less than
Total risk-based capital less than 8%; 6%;
Tier 1 risk-based capital less than 4%; Tier 1 risk-based capital less than
or 3%; or
Leverage ratio less than 4%. Leverage ratio less than 3%.
CRITICALLY UNDERCAPITALIZED
Tangible equity to total assets less
than 2%.
</TABLE>
An institution classified as Well Capitalized, Adequately Capitalized or
Undercapitalized may be treated as though it were in the next lower capital
category if the appropriate federal banking agency, after notice and opportunity
for hearing, determines that an unsafe or unsound condition or an unsafe or
unsound practice warrants such treatment. At each successive lower capital
category, an insured depository institution is subject to more restrictions. The
federal banking agencies, however, may not treat a Significantly
Undercapitalized institution as Critically Undercapitalized unless its capital
ratio actually warrants such treatment.
Insured depository institutions are prohibited from paying management fees
to any controlling persons or, with certain limited exceptions, making capital
distributions if after such transaction the institution would be
Undercapitalized. If an insured depository institution is Undercapitalized, it
will be closely monitored by the appropriate federal banking agency, subject to
asset growth restrictions and required to obtain prior regulatory approval for
acquisitions, branching and engaging in new lines of business. Any
Undercapitalized depository institution must submit an acceptable capital
restoration plan to the appropriate federal banking agency within 45 days after
receiving or being deemed to have received notice, that the institution is
Undercapitalized. The appropriate federal banking agency cannot accept a capital
plan unless, among other things, it determines that the plan: (i) specifies: (a)
the steps the institution will take to become Adequately Capitalized; (b) the
levels of capital to be attained during each year in which the plan will be in
effect; (c) how the institution will comply with the applicable restrictions or
requirements then in effect of the Federal Deposit Insurance Corporation
Improvement Act of 1991, as amended ("FDICIA"); and (d) the types and levels of
activities in which the institution will engage; (ii) is
52
<PAGE>
based on realistic assumptions and is likely to succeed in restoring the
depository institution's capital; and (iii) would not appreciably increase the
risk (including credit risk, interest-rate risk and other types of risk) to
which the institution is exposed. In addition, each company controlling an
Undercapitalized depository institution must guarantee that the institution will
comply with the capital plan until the depository institution has been
Adequately Capitalized on average during each of four consecutive calendar
quarters and must otherwise provide appropriate assurances of performance. The
aggregate liability of such guarantee is limited to the lesser of (i) an amount
equal to 5% of the depository institution's total assets at the time the
institution became Undercapitalized or (ii) the amount which is necessary to
bring the institution into compliance with all capital standards applicable to
such institution as of the time the institution fails to comply with its capital
restoration plan. Finally, the appropriate federal banking agency may impose any
of the additional restrictions or sanctions that it may impose on Significantly
Undercapitalized institutions if it determines that such action will further the
purpose of the prompt correction action provisions.
An insured depository institution that is Significantly Undercapitalized, or
is Undercapitalized and fails to submit, or in a material respect to implement,
an acceptable capital restoration plan, is subject to additional restrictions
and sanctions. These include, among other things: (i) a forced sale of voting
shares to raise capital or, if grounds exist for appointment of a receiver or
conservator, a forced merger; (ii) restrictions on transactions with affiliates;
(iii) further limitations on interest rates paid on deposits; (iv) further
restrictions on growth or required shrinkage; (v) modification or termination of
specified activities; (vi) replacement of directors or senior executive
officers; (vii) prohibitions on the receipt of deposits from correspondent
institutions; (viii) restrictions on capital distributions by the holding
companies of such institutions; (ix) required divestiture of subsidiaries by the
institution; or (x) other restrictions as determined by the appropriate federal
banking agency. Although the appropriate federal banking agency has discretion
to determine which of the foregoing restrictions or sanctions it will seek to
impose, it is required to: (i) force a sale of shares or obligations of the
bank, or require the bank to be acquired by or combine with another institution;
(ii) impose restrictions on affiliate transactions and (iii) impose restrictions
on rates paid on deposits, unless it determines that such actions would not
further the purpose of the prompt corrective action provisions. In addition,
without the prior written approval of the appropriate federal banking agency, a
Significantly Undercapitalized institution may not pay any bonus to its senior
executive officers or provide compensation to any of them at a rate that exceeds
such officer's average rate of base compensation during the 12 calendar months
preceding the month in which the institution became Undercapitalized.
Further restrictions and sanctions are required to be imposed on insured
depository institutions that are Critically Undercapitalized. For example, a
Critically Undercapitalized institution generally would be prohibited from
engaging in any material transaction other than in the ordinary course of
business without prior regulatory approval and could not, with certain
exceptions, make any payment of principal or interest on its subordinated debt
beginning 60 days after becoming Critically Undercapitalized. Most importantly,
however, except under limited circumstances, the appropriate federal banking
agency, not later than 90 days after an insured depository institution becomes
Critically Undercapitalized, is required to appoint a conservator or receiver
for the institution. The board of directors of an insured depository institution
would not be liable to the institution's stockholders or creditors for
consenting in good faith to the appointment of a receiver or conservator or to
an acquisition or merger as required by the regulator.
In addition to measures taken under the prompt corrective action provisions,
commercial banking organizations may be subject to potential enforcement actions
by the federal regulators for unsafe or unsound practices in conducting their
businesses or for violations of any law, rule, regulation or any condition
imposed in writing by the agency or any written agreement with the agency. See
"--Potential Enforcement Actions" herein.
53
<PAGE>
SAFETY AND SOUNDNESS STANDARDS
Effective July 1995, the federal banking agencies adopted final guidelines
establishing standards for safety and soundness, as required by the FDICIA.
These standards are designed to identify potential safety and soundness concerns
and ensure that action is taken to address those concerns before they pose a
risk to the deposit insurance funds. The standards relate to (i) internal
controls, information systems and internal audit systems; (ii) loan
documentation; (iii) credit underwriting; (iv) asset growth; (v) earnings; and
(vi) compensation, fees and benefits. If a federal banking agency determines
that an institution fails to meet any of these standards, the agency may require
the institution to submit to the agency an acceptable plan to achieve compliance
with the standard. If the institution fails to submit an acceptable plan within
the time allowed by the agency or fails in any material respect to implement an
accepted plan, the agency must, by order, require the institution to correct the
deficiency. Effective October 1, 1996, the federal banking agencies promulgated
safety and soundness regulations and accompanying interagency compliance
guidelines on asset quality and earnings standards. These new guidelines provide
six standards for establishing and maintaining a system to identify problem
assets and prevent those assets from deteriorating. The institution should: (i)
conduct periodic asset quality reviews to identify problem assets; (ii) estimate
the inherent losses in those assets and establish reserves that are sufficient
to absorb estimated losses; (iii) compare problem asset totals to capital; (iv)
take appropriate corrective action to resolve problem assets; (v) consider the
size and potential risks of material asset concentrations; and (vi) provide
periodic asset reports with adequate information for management and the board of
directors to assess the level of asset risk. These guidelines also set forth
standards for evaluating and monitoring earnings and for ensuring that earnings
are sufficient for the maintenance of adequate capital and reserves. If an
institution fails to comply with a safety and soundness standard, the
appropriate federal banking agency may require the institution to submit a
compliance plan. Failure to submit a compliance plan or to implement an accepted
plan may result in enforcement action.
PREMIUMS FOR DEPOSIT INSURANCE
The FDIC has adopted final regulations implementing a risk-based premium
system required by federal law, which establishes an assessment rate schedule
ranging from nothing to 27 cents per $100 of deposits applicable to members of
the Bank Insurance Fund ("BIF"). To determine the risk-based assessment for each
institution, the FDIC will categorize an institution as Well Capitalized,
Adequately Capitalized or Undercapitalized using the same standards used by the
FDIC for its prompt corrective action regulations. For purposes of assessing
FDIC premiums, an Undercapitalized institution will generally be one that does
not meet either a Well Capitalized or an Adequately Capitalized standard. The
FDIC will also assign each institution to one of three subgroups based upon
reviews by the institution's primary federal or state regulator, statistical
analyses of financial statements and other information relevant to evaluating
the risk posed by the institution. The three supervisory categories are:
financially sound with only a few minor weaknesses ("Group A"), demonstrates
weaknesses that could result in significant deterioration ("Group B") and poses
a substantial probability of loss ("Group C").
The BIF assessment rates are set forth below for institutions based on their
risk-based assessment categorization.
ASSESSMENT RATES EFFECTIVE JANUARY 1, 1996*
<TABLE>
<CAPTION>
GROUP A GROUP B GROUP C
------------- ------------- -------------
<S> <C> <C> <C>
Well Capitalized............................................... 0 3 17
Adequately Capitalized......................................... 3 10 24
Undercapitalized............................................... 10 24 27
</TABLE>
- ------------------------
* Assessment figures are expressed in terms of cents per $100 of deposits.
54
<PAGE>
The 1996 Budget Act capitalized the Savings Association Insurance Fund
("SAIF") through a special assessment on SAIF-insured deposits and which
required banks to share in part of the interest payments on the Financing
Corporation ("FICO") bonds which were issued to help fund the federal government
costs associated with the savings and loan crisis of the late 1980s. Effective
January 1, 1997, for FICO payments, SAIF-insured institutions, like First
Interstate, fsb, pay 3.2 cents per $100 in domestic deposits and BIF-insured
institutions, like the Banks, pay 0.64 cents per $100 in domestic deposits. Full
pro rata sharing of FICO interest payments takes effect on January 1, 2000.
The federal banking regulators are also authorized to prohibit depository
institutions and their holding companies from facilitating or encouraging the
shifting of deposits from SAIF to BIF for the purpose of evading thrift
assessment rates. The 1996 Budget Act also prohibits the FDIC from setting
premiums under the risk-based schedule above the amount needed to meet the
designated reserve ratio (currently 1.25%).
INTERSTATE BANKING AND BRANCHING
Under the Banking and Branching Act, a bank holding company may obtain
approval under the BHCA to acquire an existing bank located in another state
without regard to state law. A bank holding company is not permitted to make
such an acquisition if, upon consummation of the acquisition, it would control
(a) more than 10% of the total amount of deposits of insured depository
institutions in the United States or (b) 30% or more of the deposits in the
state in which the bank is located. A state may limit the percentage of total
deposits that may be held in that state by any one bank or bank holding company
if application of such limitation does not discriminate against out-of-state
banks or bank holding companies. An out-of-state bank holding company may not
acquire a state bank in existence for less than a minimum length of time that
may be prescribed by state law, except that a state may not impose more than a
five-year age requirement.
The Banking and Branching Act also permits, beginning as of June 1, 1997,
mergers of insured banks located in different states and conversion of the
branches of the acquired bank into branches of the resulting bank. Each state
may permit such combinations earlier than June 1, 1997 and may adopt legislation
to prohibit interstate mergers after that date in that state or in other states
by that state's banks. The same concentration limits discussed in the preceding
paragraph also apply to such mergers. The Banking and Branching Act also permits
a national or state bank to establish branches in a state other than its home
state if permitted by the laws of that state, subject to the same requirements
and conditions as for a merger transaction.
On March 20, 1997, the State of Montana enacted legislation which authorizes
de novo branching within the state by banks chartered under the laws of the
State of Montana. In the same legislation, Montana elected to "opt out" of full
interstate branching available under the Banking and Branching Act, thereby
precluding interstate branching in Montana until October 1, 2001. Nevertheless,
after the foregoing prohibition expires, competition in the Company's market
areas could increase significantly.
COMMUNITY REINVESTMENT ACT AND FAIR LENDING DEVELOPMENTS
The Banks are subject to certain fair lending requirements and reporting
obligations involving home mortgage lending operations and Community
Reinvestment Act ("CRA") activities. The CRA generally requires the federal
banking agencies to evaluate the record of a financial institution in meeting
the credit needs of its local communities, including low and moderate income
neighborhoods. In addition to substantial penalties and corrective measures that
may be required for a violation of certain fair lending laws, the federal
banking agencies may take compliance with such laws and CRA into account when
regulating and supervising other activities.
In May 1995, the federal banking agencies issued final regulations which
change the manner in which they measure a bank's compliance with its CRA
obligations. The final regulations adopt a performance-
55
<PAGE>
based evaluation system which bases CRA ratings on an institution's actual
lending, service and investment performance, rather than on the extent to which
the institution conducts needs assessments, documents community outreach
activities or complies with other procedural requirements.
In March 1994, the federal Interagency Task Force on Fair Lending issued a
policy statement on discrimination in lending. The policy statement describes
the three methods that federal agencies will use to prove discrimination: overt
evidence of discrimination, evidence of disparate treatment and evidence of
disparate impact.
In connection with its assessment of CRA performance, the appropriate bank
regulatory agency assigns a rating of "outstanding," "satisfactory," "needs to
improve" or "substantial noncompliance." Based on an examination conducted
during the first quarter of 1996, FIB Montana and FIB Wyoming were both rated
"satisfactory."
POTENTIAL ENFORCEMENT ACTIONS
Commercial banking organizations, such as the Banks and their
institution-affiliated parties, which include First Interstate, may be subject
to potential enforcement actions by the Federal Reserve and the FDIC for unsafe
or unsound practices in conducting their businesses or for violations of any
law, rule, regulation or any condition imposed in writing by the agency or any
written agreement with the agency. Enforcement actions may include the
imposition of a conservator or receiver, the issuance of a cease-and-desist
order that can be judicially enforced, the termination of insurance of deposits
(in the case of the Banks), the imposition of civil money penalties, the
issuance of directives to increase capital, the issuance of formal and informal
agreements, the issuance of removal and prohibition orders against institution
affiliated parties and the imposition of restrictions and sanctions under the
prompt corrective action provisions of the FDICIA. Additionally, a bank holding
company's inability to serve as a source of strength to its subsidiary banking
organizations could serve as an additional basis for a regulatory action against
such bank holding company. Neither First Interstate nor the Banks has been
subject to any such enforcement actions.
56
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth information concerning each of the directors
and executive officers of the Company:
<TABLE>
<CAPTION>
NAME AGE POSITION
- --------------------------------------- --- -------------------------------------------------------------------
<S> <C> <C>
Homer A. Scott, Jr..................... 62 Chairman of the Board
James R. Scott......................... 47 Vice Chairman of the Board
Thomas W. Scott........................ 53 President, Chief Executive Officer and Director
William H. Ruegamer(1)................. 53 Executive Vice President, Chief Operating Officer and Director
Terrill R. Moore....................... 45 Senior Vice President, Chief Financial Officer and Secretary
William G. Wilson...................... 58 Senior Vice President
Edward Garding......................... 48 Senior Vice President
Dan S. Scott........................... 66 Director
Randy Scott............................ 43 Director
Susan Scott Heyneman................... 58 Director
Joel Long.............................. 56 Director
James Haugh............................ 60 Director Nominee
</TABLE>
- ------------------------
(1) Mr. Ruegamer resigned from all positions with the Company effective October
31, 1997.
HOMER A. SCOTT, JR. has been a director of First Interstate since 1971 and
the Chairman of the Board since 1988. Mr. Scott has served as a director of
Montana-Dakota Utilities Resources Group, Inc. since 1983. Mr. Scott is the
brother of James R. Scott, Thomas W. Scott, Dan S. Scott and Susan Scott
Heyneman.
JAMES R. SCOTT has been a director of First Interstate since 1971 and the
Vice Chairman of the Board since January 1990. Currently, Mr. Scott is also
President of the First Interstate Bank Foundation. Mr. Scott is the brother of
Homer A. Scott, Jr., Thomas W. Scott, Dan S. Scott and Susan Scott Heyneman.
THOMAS W. SCOTT has been a director of First Interstate since 1971 and has
served as President and Chief Executive Officer of First Interstate since 1978.
Mr. Scott is the brother of Homer A. Scott, Jr., James R. Scott, Dan S. Scott
and Susan Scott Heyneman.
WILLIAM H. RUEGAMER has served as a director, the Executive Vice President
and Chief Operating Officer of First Interstate since 1988. Mr. Ruegamer
resigned from all positions with the Company effective October 31, 1997.
TERRILL R. MOORE has been a Senior Vice President, the Chief Financial
Officer and Secretary of First Interstate since November 1989, and served in
various finance and accounting positions within the Company since April 1979.
Mr. Moore was formerly a manager with KPMG Peat Marwick LLP.
WILLIAM G. WILSON has been a Senior Vice President of First Interstate since
1983. He was also Chief Financial Officer of First Interstate until November
1989.
EDWARD GARDING has been a Senior Vice President of First Interstate since
September 1996, and served in various management positions within the Company
since 1971.
DAN S. SCOTT has been a director of First Interstate since 1971. Mr. Scott
has served as President and General Manager of Padlock Ranch Co. and Flying V
Cattle Co. since 1970. Mr. Scott is the brother of Homer A. Scott, Jr., James R.
Scott, Thomas W. Scott and Susan Scott Heyneman.
57
<PAGE>
RANDY SCOTT has been a director of First Interstate since August 1993. Mr.
Scott was a trust officer of FIB Montana's trust division from 1991 until 1996.
In total, Mr. Scott was employed by the Company for nineteen years. Mr. Scott is
the son of Dan S. Scott.
SUSAN SCOTT HEYNEMAN has been a director of First Interstate since March
1994. Ms. Heyneman served previously as a director of First Interstate, having
resigned in 1989 to pursue personal interests. With her husband, Ms. Heyneman
has been a co-owner of the Bench Ranch for more than five years. Ms. Heyneman is
the sister of Homer A. Scott, Jr., James R. Scott, Thomas W. Scott and Dan S.
Scott.
JOEL LONG has been a director of First Interstate since May 1996. Mr. Long
has been the owner and Chairman of the Board of JTL Group, Inc., a construction
firm doing business in Montana and Wyoming, since 1990.
JAMES HAUGH is a director nominee of the Company who has been approved by
the Company's stockholders to serve as a director but has not yet been qualified
to do so. Mr. Haugh formed American Capital LLC, a financial consulting firm, in
October 1994 and has operated this firm since its inception. Prior to forming
American Capital LLC, Mr. Haugh was a partner in the accounting firm of KPMG
Peat Marwick LLP.
BOARD COMMITTEE
The Company's compensation committee is comprised of Homer A. Scott, Jr.,
James R. Scott, Dan S. Scott and Joel Long.
58
<PAGE>
EXECUTIVE COMPENSATION AND OTHER MATTERS
The following table sets forth data concerning the compensation received by
the Chief Executive Officer of First Interstate and four other executive
officers of First Interstate as of December 31, 1996, whose salary and bonus for
the year ended December 31, 1996, exceeded $100,000 in the aggregate. In all
cases, payment was for services in all capacities of First Interstate and the
Banks.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
<S> <C> <C> <C> <C> <C> <C>
LONG-TERM
ANNUAL COMPENSATION COMPENSATION
----------------------------------- ----------
NAME AND PRINCIPAL OTHER ANNUAL OPTIONS/ ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION(1) SARS COMPENSATION(2)
- ------------------------- --------- --------- --------- ------------- ---------- -------------
Thomas W. Scott ......... 1996 $ 206,000 $ 75,000 $ 7,200 -- $ 23,002
President and CEO 1995 200,000 63,000 7,200 -- 17,697
1994 194,000 60,000 7,200 -- 21,839
William H. Ruegamer ..... 1996 $ 190,000 $ 66,500 $ 199 1400/1400 $ 21,583
Executive Vice 1995 184,000 58,000 699 1400/1400 18,602
President
& COO 1994 173,500 55,000 167 1200/900 19,799
William G. Wilson ....... 1996 $ 102,000 $ 39,580 $ 7,200 600/600 $ 12,544
Senior Vice President 1995 99,000 27,720 7,200 800/800 12,597
1994 95,500 25,785 7,200 800/600 12,142
Edward Garding(3) ....... 1996 $ 106,730 $ 30,000 $ 20,860 800/800 $ 12,431
Senior Vice President 1995 NA NA NA NA NA
1994 NA NA NA NA NA
Terrill R. Moore ........ 1996 $ 86,684 $ 35,184 $ 7,200 800/800 $ 12,740
Senior Vice President & 1995 80,800 22,624 7,200 800/800 11,462
CFO 1994 77,800 21,006 7,200 800/600 10,324
</TABLE>
- ------------------------
(1) Other annual compensation principally relates to an auto allowance or the
value of personal usage of a Company-owned vehicle, except that Edward
Garding also received reimbursement of moving and related expenses
aggregating $13,660 in 1996.
(2) All other compensation includes (i) premiums paid by the Company on health
and life insurance policies, (ii) contributions by the Company to the
Company's noncontributory qualified profit sharing plan and (iii)
contributions by the Company to the Company's contributory qualified
employee savings plan, qualified under Section 401(k) of the Internal
Revenue Code of 1986, as amended (the "Code"). For the fiscal year ending
December 31, 1996, premiums on health and life insurance on behalf of Thomas
W. Scott, William H. Ruegamer, William G. Wilson, Edward Garding and Terrill
R. Moore were $3,307, $2,687, $2,687, $2,870 and $3,131, respectively. For
the fiscal year ending December 31, 1996, contributions to the Company's
profit sharing plan on behalf of Thomas W. Scott, William H. Ruegamer,
William G. Wilson, Edward Garding and Terrill R. Moore were $10,187, $9,396,
$5,044, $5,227 and $4,272, respectively. For the fiscal year ending December
31, 1996, contributions to the Company's employee savings plan on behalf of
Thomas W. Scott, William H. Ruegamer, William G. Wilson, Edward Garding and
Terrill R. Moore were $9,508, $9,500, $4,813, $4,334 and $5,337,
respectively.
(3) Not an executive officer of First Interstate prior to 1996.
59
<PAGE>
OPTION/SAR GRANTS TABLE
The following table provides information concerning grants of options to
purchase First Interstate common stock, no par value (the "Common Stock"), and
related stock appreciation rights ("SARs") made during the year ended December
31, 1996, to the persons named in the Summary Compensation Table.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE AT ASSUMED
----------------------------------------------------- ANNUAL RATES OF
NUMBER OF PERCENT OF STOCK
SECURITIES TOTAL PRICE APPRECIATION
UNDERLYING OPTIONS/ SARS EXERCISE FOR
OPTIONS/ GRANTED TO OR BASE OPTION/SAR TERM
SARS EMPLOYEES IN PRICE EXPIRATION --------------------
NAME GRANTED FISCAL YEAR ($/SH) DATE 5% 10%
- ----------------------------- ------------ ------------- ----------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Thomas W. Scott.............. -- -- -- -- -- --
William H. Ruegamer.......... 1400/1400 8.43% 17.86 1/16/06 $ 31,444 $ 79,688
William G. Wilson............ 600/600 3.61% 17.86 1/16/06 $ 13,476 $ 34,152
Edward Garding............... 800/800 4.82% 17.86 1/16/06 $ 17,968 $ 45,536
Terrill R. Moore............. 800/800 4.82% 17.86 1/16/06 $ 17,968 $ 45,536
</TABLE>
The following table indicates the number and value of the stock options and
SARs exercised in 1996 and the number and value of unexercised stock options and
SARs as of December 31, 1996. All stock options and SARs are currently
exercisable.
AGGREGATED OPTION/SAR EXERCISES IN 1996 AND FISCAL YEAR-END VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED,
NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AND
SHARES ACQUIRED VALUE OPTIONS/SARS HELD AT SARS AT DECEMBER 31,
NAME ON EXERCISE REALIZED DECEMBER 31, 1996 1996
- ------------------------------- ----------------- ------------- --------------------- ------------------------
<S> <C> <C> <C> <C>
Thomas W. Scott................ -- -- -- --
William H. Ruegamer............ 3,224 $ 75,095 11,488/7,444 $ 195,311
William G. Wilson.............. 608 $ 11,906 5,200/3,500 $ 79,679
Edward Garding................. 1,704 $ 39,690 8,140/5,070 $ 144,362
Terrill R. Moore............... 1,888 $ 43,976 7,476/4,738 $ 127,912
</TABLE>
TERMINATION OF EMPLOYMENT ARRANGEMENT
On August 25, 1997, the Company entered into an agreement with William H.
Ruegamer (the "Resignation Agreement"), pursuant to which Mr. Ruegamer and the
Company agreed that Mr. Ruegamer will resign from his employment with the
Company effective October 31, 1997. Under the Resignation Agreement, Mr.
Ruegamer agreed to release the Company from any potential claims, and the
Company agreed to provide Mr. Ruegamer (i) a 1997 performance bonus of $55,000,
(ii) the sum of $250,000, payable in 24 equal monthly installments, (iii) health
and dental insurance for Mr. Ruegamer and his spouse until October 31, 2001
(unless Mr. Ruegamer obtains other employment prior to that time), and (iv) a
term life insurance policy in the amount of $500,000 to be funded by the Company
for a period of 10 years. In consideration of Mr. Ruegamer agreeing not to
compete for a period of two years, the Company also agreed (i) to extend the
period in which the Company could repurchase any Common Stock owned by Mr.
Ruegamer, (ii) to extend the exercise period of stock options and SARs held by
Mr. Ruegamer, and (iii) to provide a lump-sum payment of $250,000 to Mr.
Ruegamer on November 1, 1999.
60
<PAGE>
SURVIVOR INCOME BENEFIT
The Company has entered into survivor income agreements (the "Survivor
Agreements") with certain executive employees to encourage the executives to
remain employees of the Company. Under the Survivor Agreements, designated
beneficiaries are entitled to receive a survivor income benefit if the Company
owns a life insurance policy on the executive's life and the executive dies
before otherwise terminating employment with the Company. Pursuant to the
Survivor Agreements and addenda thereto, if the executive voluntarily terminates
employment after age sixty, the Survivor Agreement may convert to a split dollar
insurance agreement whereby the designated beneficiary is entitled to the death
proceeds of the life insurance policy less the cash surrender value of the
policy on the day before death. The Company has entered into this type of
Survivor Agreement with William H. Ruegamer, William G. Wilson and Edward
Garding.
STOCK OPTION AND STOCK APPRECIATION RIGHTS PLAN
The Company has a Stock Option and Stock Appreciation Rights Plan (the
"Plan") for key senior officers of the Company. The Plan provides for the
granting of stock options which are non-qualified under the Code and SARs in
tandem with such options. Each option granted under the Plan may be exercised
within a period of ten years from the date of grant. The Plan allows the holder
of the stock option granted under the Plan to surrender an exercisable stock
option in exchange for cash or shares of the Common Stock in an amount equal to
the appraised minority value of covered shares over the option price of such
shares.
COMPENSATION OF DIRECTORS
Directors who are members of the Scott family or who are executive officers
of the Company ("Inside Directors") are compensated for their services in the
form of a salary and bonus, as determined by the Compensation Committee of the
Board of Directors from time to time. Of the directors not named in the Summary
Compensation Table above, Homer A. Scott, Jr. was paid a salary of $99,000 in
each of 1996 and 1995 and a salary of $125,000 in 1994. He was also paid a bonus
of $15,000 in 1996, $4,000 in 1995 and $10,000 in 1994. James R. Scott was paid
a salary of $102,250 in each of 1996, 1995 and 1994 and a bonus of $15,000 in
1996, $10,000 in 1995 and $10,000 in 1994. In 1996, the Company also paid Dan S.
Scott a salary of $39,000 and a bonus of $15,000, and Randy Scott a salary of
$18,050. Non-Inside Directors, presently consisting of Joel Long, receive a $400
monthly retainer, $500 per board meeting attended and $250 for each committee
meeting attended.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Homer A. Scott, Jr., James R. Scott, Dan S. Scott, and Joel Long serve on
the Compensation Committee of the Board of Directors. With the exception of Joel
Long, all committee members were officers or employees receiving compensation
from First Interstate for services rendered. Homer A. Scott, Jr. and James R.
Scott were formerly officers of First Interstate.
INDEMNIFICATION
Officers and directors of First Interstate are entitled to indemnification
under the Montana Business Corporation Act and pursuant to a Resolution of the
Board of Directors dated January 12, 1987. A summary of the indemnification
provision in such resolution follows:
Pursuant to a resolution of the Board of Directors dated January 12, 1987,
and under the authority of Section 35-1-414 of the Montana Business Corporation
Act, the Company shall indemnify each director and officer of the Company
(including former officers and directors) and each agent of the Company serving
as a director or officer of a Bank, serving at the specific direction or request
of the Company (but only to the extent that such director, officer or agent is
not indemnified by the Bank or by insurance
61
<PAGE>
provided by the Company), against judgments, penalties, fines, settlements and
reasonable expenses actually and reasonably paid by such director, officer or
agent by reason of the fact that he or she is or was a director or officer of
the Company or such Bank, to the extent provided by and subject to the
limitations of the Montana Business Corporation Act.
CERTAIN RELATED TRANSACTIONS
First Interstate and the Banks have had, and expect to have in the future,
banking transactions in the ordinary course of business with related parties,
including business with directors, officers, stockholders and their associates,
on the same terms, including interest rates and collateral on loans, as those
prevailing at the same time for comparable transactions with unrelated persons
and that did not involve more than a normal risk of collectibility or present
other unfavorable features. Such transactions include correspondent banking
relationships with affiliated banks, and data processing servicing for
affiliated banks, in addition to other customary banking services. To the extent
that such transactions consisted of extensions of credit to Company executive
officers and directors and to certain members of the Scott family, such
extensions of credit were made in the ordinary course of business, were made on
substantially the same terms, including interest rates and collateral on loans,
as those prevailing at the same time for comparable transactions with unrelated
persons and did not involve more than a normal risk of collectibility or present
other unfavorable features. Loans to First Interstate's executive officers,
directors and their related interests represented approximately 7.0% of the
Company's stockholders' equity as of December 31, 1996. Loans to executive
officers, directors and related interests of officers and directors of First
Interstate and the Banks represented approximately 8.0% of the Company's
stockholders' equity as of December 31, 1996.
In January 1996, 78,824 shares of Common Stock were sold by certain
directors of the Company to 287 individual participants in the Company's 401(k)
Savings Plan. The total cash price was $1.41 million.
In July 1996, 65,848 shares of Common Stock were sold by the Company to 353
individual participants in the Company's 401(k) Savings Plan. The total cash
price was $1.26 million. Further, in July 1996, 100,280 shares of Common Stock
were sold by the Company to certain officers, directors, director nominees and
employees. The total cash price was $1.92 million.
In July 1997, 78,072 shares of Common Stock were sold by the Company to
certain officers, directors, director nominees and employees. The total cash
price was $1.66 million.
In October 1997, 87,236 shares of Common Stock were sold by the Company to
403 individual participants in the Company's 401(k) Savings Plan. The total cash
price was $2.05 million.
From time to time the Company repurchases shares of Common Stock from
stockholders of the Company pursuant to stockholder repurchase agreements and
otherwise at the then appraised value thereof. In addition, the Company may
redeem shares of Common Stock from the Company's 401(k) Savings Plan on a
quarterly basis in accordance with the investment elections of the plan's
participants or in connection with distributions under the plan. For the six
months ended June 30, 1997 and the year ended December 31, 1996, the Company
redeemed shares of Common Stock from the Company's 401(k) Savings Plan in the
amount of $70,000 and $71,000, respectively.
The Company is the anchor tenant in a commercial building in which the
Company's principal executive offices are located in Billings, Montana. The
building is owned by a joint venture partnership in which FIB Montana is one of
the two partners, owning a 50% interest in the partnership. The other 50%
interest in the partnership is owned by a company in which Joel Long, a director
of the Company, owns beneficially an equity interest of approximately 33%.
Indebtedness of the partnership ($10.8 million as of December 31, 1996) is
recourse to the partners and guaranteed by the Company. The Company paid rent to
the partnership of $611,000, $814,000, $711,000 and $690,000 for the first six
months of 1997 and for 1996, 1995 and 1994, respectively.
62
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information as of October 1, 1997 with
respect to the beneficial ownership of the Common Stock for (i) each person who
is known by the Company to own beneficially more than 5% of the Common Stock,
(ii) each of the Company's directors and director nominees, (iii) each of the
executive officers named in the Summary Compensation Table, and (iv) all
directors and executive officers as a group. Unless otherwise indicated in the
notes to the table, all shares shown in the following table are owned both of
record and beneficially and each of the following parties has sole voting and
investment power with respect to such shares.
<TABLE>
<CAPTION>
NUMBER OF SHARES
BENEFICIALLY PERCENT
BENEFICIAL OWNER OWNED(1) BENEFICIALLY OWNED
- ---------------------------------------------------- -------------------- -------------------
<S> <C> <C>
James R. Scott(2) .................................. 1,367,816 17.02%
439 Grandview Blvd.
Billings, Montana 59102
Randy Scott(3) ..................................... 1,160,760 14.44%
521 Freedom Avenue
Billings, Montana 59105
Homer A. Scott, Jr.(4) ............................. 1,056,668 13.15%
122 Scott Drive
Sheridan, Wyoming 82801
Thomas W. Scott .................................... 773,778 9.63%
P.O. Box 30876
Billings, Montana 59107
Susan Scott Heyneman(5) ............................ 569,876 7.09%
P.O. Box 285
Fishtail, Montana 59028
FIB Montana(6) ..................................... 497,600 6.19%
P.O. Box 30918
Billings, Montana 59116
Dan S. Scott(7)..................................... 381,068 4.74%
William H. Ruegamer(8).............................. 40,696 0.51%
William G. Wilson(8)................................ 31,528 0.39%
Edward Garding(8)................................... 21,644 0.27%
Terrill R. Moore(8)................................. 17,992 0.22%
Joel Long........................................... 4,940 0.06%
All directors and executive officers as a group (11
persons)(8)....................................... 5,426,766 67.24%
</TABLE>
- ------------------------
(1) Beneficial ownership is determined in accordance with the rules of the
Securities and Exchange Commission and generally includes voting or
investment power with respect to the securities owned. Shares of Common
Stock subject to options currently exercisable or exercisable within 60 days
of October 1, 1997, are deemed outstanding for purposes of computing the
percentage of the person or entity holding such securities but are not
deemed outstanding for purposes of computing the percentage of any other
person or entity.
(2) Includes 560,068 shares owned beneficially as managing partner of J.S.
Investments Limited Partnership, 24,988 shares as trustee for John M.
Heyneman, Jr. and 24,988 shares as trustee for Thomas Scott Heyneman.
(3) Includes 1,119,792 shares owned beneficially as managing partner of Nbar5
Limited Partnership.
(4) Includes 88,816 shares owned beneficially as trustee for Riki Rae Scott
Davidson, 75,276 shares as trustee for Risa Kae Scott Brown and 88,824
shares as trustee for Rae Ann Scott Morse.
63
<PAGE>
(5) Includes 323,060 shares owned beneficially as general partner of Towanda
Investments, Limited Partnership.
(6) Includes 230,360 shares owned beneficially as trustee for Jonathan R. Scott,
229,420 shares as trustee for Julie Anne Scott, 35,200 shares as trustee for
James F. Heyneman and 2,620 shares as trustee for James R. Scott, Jr.
(7) Includes 48,960 shares owned beneficially as managing partner of Nbar5 A,
41,452 shares as managing partner of Nbar5 O, 37,700 shares as managing
partner of Nbar5 K, 33,944 shares as managing partner of Nbar5 S and 33,944
shares as managing partner of Nbar5 T.
(8) Includes options to purchase 10,784 shares, 6,000 shares, 7,956 shares and
7,292 shares held by William H. Ruegamer, William G. Wilson, Edward Garding
and Terrill R. Moore, respectively.
DESCRIPTION OF THE TRUST PREFERRED SECURITIES
The Trust Preferred Securities and the Common Securities will be issued
pursuant to the terms of the Trust Agreement. The Trust Agreement will be
qualified as an indenture under the Trust Indenture Act. Initially, Wilmington
Trust Company will be the Delaware Trustee and the Property Trustee and will act
as trustee for the purpose of complying with the Trust Indenture Act. The terms
of the Trust Preferred Securities will include those stated in the Trust
Agreement and those made part of the Trust Agreement by the Trust Indenture Act.
This summary of certain terms and provisions of the Trust Preferred Securities
and the Trust Agreement does not purport to be complete and is subject to, and
is qualified in its entirety by reference to, all the provisions of the Trust
Agreement, including the definitions therein of certain terms, and the Trust
Indenture Act. Wherever particular defined terms of the Trust Agreement (as
amended or supplemented from time to time) are referred to herein, such defined
terms are incorporated herein. The form of the Trust Agreement has been filed as
an exhibit to the Registration Statement of which this Prospectus forms a part.
GENERAL
Pursuant to the terms of the Trust Agreement, FIB Capital will issue the
Trust Securities. The Trust Preferred Securities will represent preferred
undivided beneficial interests in the assets of FIB Capital and the holders
thereof will be entitled to a preference in certain circumstances with respect
to Distributions and amounts payable on redemption or liquidation over the
Common Securities (which will be held by First Interstate), as well as other
benefits as described in the Trust Agreement.
The Trust Preferred Securities will represent undivided beneficial ownership
interests in the assets of FIB Capital and the holders thereof will be entitled
to a preference in certain circumstances with respect to Distributions and
amounts payable on redemption or liquidation over Common Securities, as well as
other benefits enumerated in the Guarantee Agreement. The Trust Preferred
Securities will rank PARI PASSU, and payments will be made thereon pro rata,
with the Common Securities except as described under "Subordination of Common
Securities of FIB Capital Held by First Interstate" below.
Legal title to the Junior Subordinated Debentures will be held by the
Property Trustee in trust for the benefit of the holders of the Trust
Securities. The Guarantee Agreement executed by First Interstate for the benefit
of the holders of the Trust Preferred Securities will be a guarantee on a
subordinated basis and will not guarantee payment of Distributions or amounts
payable on redemption of the Trust Preferred Securities or on liquidation of the
Trust Preferred Securities if FIB Capital does not have funds on hand available
to make such payments. See "Description of Guarantee."
64
<PAGE>
DISTRIBUTIONS
PAYMENT OF DISTRIBUTIONS
Distributions on the Trust Preferred Securities will be payable at the
annual rate of 8 5/8% of the stated liquidation amount of $25 (the "Liquidation
Amount"), payable quarterly in arrears on the last day of March, June, September
and December in each year, commencing December 31, 1997, to the holders of the
Trust Preferred Securities on the relevant record dates (each date on which
Distributions are payable in accordance with the foregoing, a "Distribution
Date"). The amount of each Distribution due with respect to the Trust Preferred
Securities will include amounts accrued to, but excluding, the date the
Distribution payment is due. Distributions on the Trust Preferred Securities
will be payable to the holders thereof as they appear on the register of FIB
Capital on the relevant record date which, for so long as the Trust Preferred
Securities remain in book-entry form, will be one Business Day (as defined
below) prior to the relevant Distribution Date and, in the event the Trust
Preferred Securities are not in book-entry form, will be the first day of the
month in which the relevant Distribution Date occurs. Distributions will
accumulate from the date of original issuance. The first Distribution Date for
the Trust Preferred Securities will be December 31, 1997.
The amount of Distributions payable for any period will be computed on the
basis of a 360-day year of twelve 30-day months. In the event that any date on
which Distributions are payable on the Trust Preferred Securities is not a
Business Day, payment of the Distribution payable on such date will be made on
the next Business Day (and without any interest or other payment in respect to
any such delay) except that, if such Business Day is in the next succeeding
calendar year, payment of such Distribution shall be made on the immediately
preceding Business Day, in each case with the same force and effect as if made
on the date such payment was originally payable. As used in this Prospectus, a
"Business Day" shall mean any day other than a Saturday or a Sunday, or a day on
which banking institutions in the State of Montana are authorized or required by
law or executive order to remain closed or a day on which the corporate trust
office of the Property Trustee or the Indenture Trustee is closed for business.
The funds of FIB Capital available for distribution to holders of the Trust
Preferred Securities will be limited to payments by First Interstate under the
Junior Subordinated Debentures in which FIB Capital will invest the proceeds
from the issuance and sale of the Trust Preferred Securities. See "Description
of Junior Subordinated Debentures." If First Interstate does not make interest
payments on the Junior Subordinated Debentures, the Property Trustee will not
have funds available to pay Distributions on the Trust Preferred Securities. The
payment of Distributions (if and to the extent FIB Capital has funds legally
available for the payment of such Distributions and cash sufficient to make such
payments) is guaranteed by First Interstate. See "Description of Guarantee."
EXTENSION PERIOD
So long as no Debenture Event of Default has occurred and is continuing,
First Interstate has the right under the Indenture to defer the payment of
interest on the Junior Subordinated Debentures at any time or from time to time
for an Extension Period, provided that no Extension Period may extend beyond the
Stated Maturity of the Junior Subordinated Debentures. As a consequence of any
such election, quarterly Distributions on the Trust Preferred Securities will be
deferred by FIB Capital during any such Extension Period. Distributions to which
holders of Trust Preferred Securities are entitled will accumulate additional
amounts thereon at the rate per annum of 8 5/8% thereof, compounded quarterly
from the relevant Distribution Date, to the extent permitted under applicable
law. The term "Distributions" as used herein shall include any such additional
accumulated amounts. During any such Extension Period, First Interstate may not
(i) declare or pay any dividends or distributions on, or redeem, purchase,
acquire, or make a liquidation payment with respect to, any of First
Interstate's capital stock (which includes the Common Stock and preferred stock)
or (ii) make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of First Interstate that rank PARI
PASSU with or junior in interest to the Junior Subordinated Debentures or make
any guarantee payments with respect to any
65
<PAGE>
guarantee by First Interstate of the debt securities of any Bank if such
guarantee ranks PARI PASSU with or junior in interest to the Junior Subordinated
Debentures; provided, however, that First Interstate may (a) pay dividends on or
make distributions in the Common Stock, (b) declare a dividend in connection
with the implementation of a stockholders' rights plan, or issue stock under any
such plan in the future, or redeem or repurchase any such rights pursuant
thereto, (c) make payments under the Guarantee and (d) purchase Common Stock for
issuance of Common Stock or rights under any of First Interstate's benefit plans
for its directors, officers or employees. Prior to the termination of any such
Extension Period, First Interstate may further extend such Extension Period,
provided that such extension does not cause such Extension Period to exceed 20
consecutive quarters or extend beyond the Stated Maturity. Upon the termination
of any such Extension Period and the payment of all amounts then due, and
subject to the foregoing limitations, First Interstate may elect to begin a new
Extension Period. Subject to the foregoing, there is no limitation on the number
of times that First Interstate may elect to begin an Extension Period. First
Interstate has no current intention of exercising its right to defer payments of
interest by extending the interest payment period on the Junior Subordinated
Debentures.
REDEMPTION
MANDATORY REDEMPTION
Upon the repayment or redemption at any time, in whole or in part, of any
Junior Subordinated Debentures, the proceeds from such repayment or redemption
shall be applied by the Property Trustee to redeem a Like Amount of the Trust
Securities, upon not less than 30 nor more than 60 days' notice of a date of
redemption (the "Redemption Date"), at the Redemption Price (as defined below).
See "Description of Junior Subordinated Debentures--Redemption." If less than
all of the Junior Subordinated Debentures are to be repaid or redeemed on a
Redemption Date, then the proceeds from such repayment or redemption shall be
allocated to the redemption of the Trust Securities pro rata.
OPTIONAL REDEMPTION
First Interstate will have the right to redeem the Junior Subordinated
Debentures (i) on or after December 1, 2002, in whole at any time or in part
from time to time at a redemption price equal to the accrued and unpaid interest
on the Junior Subordinated Debentures so redeemed to the date fixed for
redemption, plus 100% of the principal amount thereof, or (ii) at any time, in
whole (but not in part), upon the occurrence of a Tax Event, an Investment
Company Event or a Capital Treatment Event at a redemption price equal to the
accrued and unpaid interest on the Junior Subordinated Debentures so redeemed to
the date fixed for redemption, plus 100% of the principal amount thereof, in
each case subject to receipt of prior approval by the Federal Reserve if then
required under applicable capital guidelines or policies of the Federal Reserve.
See "Description of Junior Subordinated Debentures-- Redemption."
TAX EVENT REDEMPTION, INVESTMENT COMPANY EVENT REDEMPTION, CAPITAL TREATMENT
EVENT REDEMPTION OR DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES
If a Tax Event, an Investment Company Event or a Capital Treatment Event
shall occur and be continuing, First Interstate has the right to redeem the
Junior Subordinated Debentures in whole (but not in part) and thereby cause a
mandatory redemption of the Trust Securities in whole (but not in part) at the
Redemption Price within 90 days following the occurrence of such Tax Event,
Investment Company Event or Capital Treatment Event, in each case subject to
receipt of prior approval by the Federal Reserve if then required under
applicable capital guidelines or policies of the Federal Reserve. In the event a
Tax Event, an Investment Company Event or Capital Treatment Event has occurred
and is continuing and First Interstate does not elect to redeem the Junior
Subordinated Debentures and thereby cause a mandatory redemption of the Trust
Securities or to liquidate FIB Capital and cause the Junior Subordinated
Debentures to be distributed to holders of the Trust Securities in liquidation
of FIB Capital as described
66
<PAGE>
below, such Trust Securities will remain outstanding and Additional Sums (as
defined below) may be payable on the Junior Subordinated Debentures.
DEFINITIONS
"Additional Sums" means the additional amounts as may be necessary to be
paid by First Interstate with respect to the Junior Subordinated Debentures in
order that the amount of Distributions then due and payable by FIB Capital on
the outstanding Trust Securities of FIB Capital shall not be reduced as a result
of any additional taxes, duties and other governmental charges to which FIB
Capital has become subject as a result of a Tax Event.
"Like Amount" means (i) with respect to a redemption of Trust Securities,
Trust Securities having a Liquidation Amount equal to that portion of the
principal amount of Junior Subordinated Debentures to be contemporaneously
redeemed in accordance with the Indenture, allocated to the Common Securities
and to the Trust Preferred Securities based upon the relative Liquidation
Amounts of such classes and the proceeds of which will be used to pay the
Redemption Price of such Trust Securities, and (ii) with respect to a
distribution of Junior Subordinated Debentures to holders of Trust Securities in
connection with a dissolution or liquidation of FIB Capital, Junior Subordinated
Debentures having a principal amount equal to the Liquidation Amount of the
Trust Securities of the holder to whom such Junior Subordinated Debentures are
distributed.
"Redemption Price" means, with respect to any Trust Security, the
Liquidation Amount plus accumulated and unpaid Distributions to the Redemption
Date, allocated on a pro rata basis (based on Liquidation Amounts) among the
Trust Securities.
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES
Subject to First Interstate and FIB Capital having received an opinion of
counsel to the effect that such distribution will not be a taxable event to the
holders of the Trust Preferred Securities and prior approval of the Federal
Reserve if so required under applicable capital guidelines or policies of the
Federal Reserve, First Interstate will have the right at any time to dissolve
FIB Capital and, after satisfaction of the liabilities of creditors of FIB
Capital as provided by applicable law, cause the Junior Subordinated Debentures
to be distributed to the holders of Trust Securities in liquidation of FIB
Capital. After the liquidation date fixed for any distribution of Junior
Subordinated Debentures for Trust Preferred Securities (i) such Trust Preferred
Securities will no longer be deemed to be outstanding, (ii) DTC or its nominee,
as the record holder of the Trust Preferred Securities, will receive a
registered global certificate or certificates representing the Junior
Subordinated Debentures to be delivered upon such distribution and (iii) any
certificates representing Trust Preferred Securities not held by DTC or its
nominee will be deemed to represent the Junior Subordinated Debentures having a
principal amount equal to the Liquidation Amount, and bearing accrued and unpaid
interest in an amount equal to the accrued and unpaid Distributions on the Trust
Preferred Securities until such certificates are presented to the Administrative
Trustees or their agent for transfer or reissuance.
There can be no assurance as to the market prices for the Trust Preferred
Securities or the Junior Subordinated Debentures that may be distributed in
exchange for the Trust Preferred Securities if a dissolution and liquidation of
FIB Capital were to occur. Accordingly, the Trust Preferred Securities that an
investor may purchase, or the Junior Subordinated Debentures that the investor
may receive on dissolution and liquidation of FIB Capital, may trade at a
discount to the price that the investor paid to purchase the Trust Preferred
Securities offered hereby.
REDEMPTION PROCEDURES
Trust Preferred Securities redeemed on each Redemption Date shall be
redeemed at the Redemption Price with the applicable proceeds from the
contemporaneous redemption of the Junior Subordinated Debentures. Redemptions of
the Trust Preferred Securities shall be made and the Redemption Price shall
67
<PAGE>
be payable on each Redemption Date only to the extent that FIB Capital has funds
on hand available for the payment of such Redemption Price. See "Subordination
of Common Securities of FIB Capital Held by First Interstate" herein and
"Description of Guarantee."
If FIB Capital gives a notice of redemption in respect of the Trust
Preferred Securities, then, by 12:00 noon, Montana time, on the Redemption Date,
to the extent funds are available, the Property Trustee will deposit with DTC
funds sufficient to pay the aggregate Redemption Price and will give DTC
irrevocable instructions and authority to pay the Redemption Price to the
holders of such Trust Preferred Securities. See "Book-Entry Issuance." If such
Trust Preferred Securities are no longer in book-entry form, the Property
Trustee, to the extent funds are available, will deposit with the paying agent
for such Trust Preferred Securities funds sufficient to pay the aggregate
Redemption Price and will give such paying agent irrevocable instructions and
authority to pay the Redemption Price to the holders thereof upon surrender of
their certificates evidencing such Trust Preferred Securities. Notwithstanding
the foregoing, Distributions payable on or prior to the Redemption Date shall be
payable to the holders of such Trust Preferred Securities on the relevant record
dates for the related Distribution Dates. If notice of redemption shall have
been given and funds deposited as required, then upon the date of such deposit,
all rights of the holders of the Trust Preferred Securities will cease, except
the right of the holders of the Trust Preferred Securities to receive the
applicable Redemption Price, but without interest on such Redemption Price, and
such Trust Preferred Securities will cease to be outstanding. If any date fixed
for redemption of such Trust Preferred Securities is not a Business Day, then
payment of the Redemption Price payable on such date will be made on the next
succeeding Business Day (and without any interest or other payment in respect of
any such delay), except that, if such Business Day falls in the next calendar
year, such payment will be made on the immediately preceding Business Day. In
the event that payment of the Redemption Price in respect of Trust Preferred
Securities called for redemption is improperly withheld or refused and not paid
either by FIB Capital or by First Interstate pursuant to the Guarantee,
Distributions on such Trust Preferred Securities will continue to accrue at the
then applicable rate, from the Redemption Date originally established by FIB
Capital for such Trust Preferred Securities to the date such Redemption Price is
actually paid, in which case the actual payment date will be the date fixed for
redemption for purposes of calculating the Redemption Price. See "Description of
Guarantee."
Subject to applicable law (including, without limitation, United States
federal securities law), First Interstate may at any time and from time to time
purchase outstanding Trust Preferred Securities by tender, in the open market or
by private agreement.
Payment of the Redemption Price on the Trust Preferred Securities and any
distribution of Junior Subordinated Debentures to holders of Trust Preferred
Securities shall be made to the applicable recordholders thereof as they appear
on the register of such Trust Preferred Securities on the relevant record date,
which date shall be one Business Day prior to the relevant Redemption Date or
Liquidation Date, as applicable; provided, however, that if any Trust Preferred
Securities are not in book-entry form, the relevant record date for such Trust
Preferred Securities shall be a date at least 15 days prior to the Redemption
Date or Liquidation Date, as applicable. In the case of a liquidation, the
record date shall be no more than 45 days before the Liquidation Date.
If less than all of the Trust Securities issued by FIB Capital are to be
redeemed on a Redemption Date, then the aggregate Redemption Price for such
Trust Securities to be redeemed shall be allocated pro rata to the Trust
Preferred Securities and Common Securities based upon the relative Liquidation
Amounts of such classes. The particular Trust Preferred Securities to be
redeemed shall be selected by the Property Trustee from the outstanding Trust
Preferred Securities not previously called for redemption, by such method as the
Property Trustee shall deem fair and appropriate and which may provide for the
selection for redemption of portions (equal to $25 or an integral multiple
thereof) of the Liquidation Amount of Trust Preferred Securities. The Property
Trustee shall promptly notify the security registrar in writing of the Trust
Preferred Securities selected for redemption and, in the case of any Trust
Preferred Securities selected for partial redemption, the Liquidation Amount
thereof to be redeemed. For all
68
<PAGE>
purposes of the Trust Agreement, unless the context otherwise requires, all
provisions relating to the redemption of Trust Preferred Securities shall relate
to the portion of the aggregate Liquidation Amount of Trust Preferred Securities
which has been or is to be redeemed.
Notice of any redemption will be mailed at least 30 days but not more than
60 days before the Redemption Date to each holder of Trust Securities at such
holder's registered address. Unless FIB Capital defaults in payment of the
applicable Redemption Price, on and after the Redemption Date, Distributions
will cease to accrue on such Trust Preferred Securities called for redemption.
SUBORDINATION OF COMMON SECURITIES OF FIB CAPITAL HELD BY FIRST INTERSTATE
Payment of Distributions on, and the Redemption Price of, the Trust
Preferred Securities and Common Securities, as applicable, shall be made pro
rata based on the Liquidation Amounts of the Trust Preferred Securities and
Common Securities; provided, however, that if on any Distribution Date or
Redemption Date a Debenture Event of Default shall have occurred and be
continuing, no payment of any Distribution on, or applicable Redemption Price
of, any of the Common Securities, and no other payment on account of the
redemption, liquidation or other acquisition of the Common Securities, shall be
made unless payment in full in cash of all accumulated and unpaid Distributions
on all of the outstanding Trust Preferred Securities for all Distribution
periods terminating on or prior thereto, or in the case of payment of the
applicable Redemption Price the full amount of such Redemption Price on all of
the outstanding Trust Preferred Securities then called for redemption, shall
have been made or provided for, and all funds available to the Property Trustee
shall first be applied to the payment in full in cash of all Distributions on,
or Redemption Price of, the Trust Preferred Securities then due and payable.
In the case of any Event of Default under the Trust Agreement resulting from
a Debenture Event of Default, First Interstate as holder of the Common
Securities will be deemed to have waived any right to act with respect to any
such Event of Default until the effect of all such Events of Default have been
cured, waived or otherwise eliminated. Until any such Events of Default have
been so cured, waived or otherwise eliminated, the Property Trustee shall act
solely on behalf of the holders of the Trust Preferred Securities and not on
behalf of First Interstate as holder of the Common Securities, and only the
holders of the Trust Preferred Securities will have the right to direct the
Property Trustee to act on their behalf.
LIQUIDATION DISTRIBUTION UPON DISSOLUTION
First Interstate will have the right at any time to dissolve FIB Capital
and, after satisfaction of liabilities to creditors of the Trust as provided by
applicable law, cause the Junior Subordinated Debentures to be distributed to
the holders of the Trust Preferred Securities. Such right is subject to First
Interstate having received prior approval of the Federal Reserve if then
required under applicable capital guidelines or policies of the Federal Reserve.
See "Distribution of Junior Subordinated Debentures."
In addition, pursuant to the Trust Agreement, FIB Capital shall
automatically dissolve upon expiration of its term and shall earlier dissolve on
the first to occur of: (i) certain events of bankruptcy, dissolution or
liquidation of First Interstate; (ii) the distribution of a Like Amount of the
Junior Subordinated Debentures to the holder of its Trust Securities, if First
Interstate, as Depositor, has delivered written direction to the Property
Trustee to dissolve FIB Capital (which direction is optional and, except as
described above, wholly within the discretion of First Interstate, as
Depositor); (iii) redemption of all of the Trust Preferred Securities as
described under "Redemption--Mandatory Redemption;" (iv) expiration of the term
of FIB Capital; or (v) the entry of an order for the dissolution of FIB Capital
by a court of competent jurisdiction.
If an early dissolution occurs as described in clause (i), (ii), (iv) or (v)
above, FIB Capital shall be liquidated by the Trustees as expeditiously as the
Trustees determine to be possible by distributing, after satisfaction of
liabilities to creditors of FIB Capital as provided by applicable law, to the
holders of such Trust Securities a Like Amount of the Junior Subordinated
Debentures, unless such distribution is determined by the Property Trustee not
to be practical, in which event such holders will be entitled to
69
<PAGE>
receive out of the assets of FIB Capital available for distribution to holders,
after satisfaction of liabilities to creditors of FIB Capital as provided by
applicable law, an amount equal to, in the case of holders of Trust Preferred
Securities, the aggregate of the Liquidation Amount plus accrued and unpaid
Distributions thereon to the date of payment (such amount being the "Liquidation
Distribution"). If such Liquidation Distribution can be paid only in part
because FIB Capital has insufficient assets available to pay in full the
aggregate Liquidation Distribution, then the amounts payable directly by FIB
Capital on the Trust Preferred Securities shall be paid on a pro rata basis. The
holder(s) of the Common Securities will be entitled to receive distributions
upon any such liquidation pro rata with the holders of the Trust Preferred
Securities, except that if a Debenture Event of Default has occurred and is
continuing, the Trust Preferred Securities shall have a priority over the Common
Securities.
Under current United States federal income tax law and interpretations and
assuming, as expected, FIB Capital is treated as a grantor trust, a distribution
of the Junior Subordinated Debentures should not be a taxable event to holders
of the Trust Preferred Securities. Should there be a change in law, a change in
legal interpretation, a Tax Event or other circumstances, however, the
distribution could be a taxable event to holders of the Trust Preferred
Securities. See "Certain Federal Income Tax Consequences." If First Interstate
elects neither to redeem the Junior Subordinated Debentures prior to maturity
nor to dissolve FIB Capital and distribute the Junior Subordinated Debentures to
holders of the Trust Preferred Securities, the Trust Preferred Securities will
remain outstanding until the repayment of the Junior Subordinated Debentures.
If First Interstate elects to dissolve FIB Capital and thereby causes the
Junior Subordinated Debentures to be distributed to holders of the Trust
Preferred Securities in liquidation of FIB Capital, First Interstate shall
continue to have the right to shorten the maturity of such Junior Subordinated
Debentures, subject to certain conditions. See "Description of Junior
Subordinated Debentures--General."
EVENTS OF DEFAULT; NOTICE
Any one of the following events that has occurred and is continuing
constitutes an "Event of Default" under the Trust Agreement (an "Event of
Default") with respect to the Trust Preferred Securities (whatever the reason
for such Event of Default and whether it shall be voluntary or involuntary or be
effected by operation of law or pursuant to any judgment, decree or order of any
court or any order, rule or regulation of any administrative or governmental
body):
(i) the occurrence of a Debenture Event of Default (see "Description of
Junior Subordinated Debentures--Debenture Events of Default");
(ii) default by FIB Capital in the payment of any Distribution when it
becomes due and payable, and continuation of such default for a period of 30
days;
(iii) default by FIB Capital in the payment of any Redemption Price of
any Trust Security when it becomes due and payable;
(iv) default in the performance, or breach, in any material respect, of
any covenant or warranty of the Trustees in the Trust Agreement (other than
a default or breach in the performance of a covenant or warranty which is
addressed in clause (ii) or (iii) above), and continuation of such default
or breach, for a period of 60 days after there has been given, by registered
or certified mail, to the defaulting Issuer Trustee or Trustees by the
holders of at least 25% in aggregate Liquidation Amount of the outstanding
Trust Preferred Securities, a written notice specifying such default or
breach and requiring it to be remedied and stating that such notice is a
"Notice of Default" under the Trust Agreement; or
(v) the occurrence of certain events of bankruptcy or insolvency with
respect to the Property Trustee and the failure by First Interstate to
appoint a successor Property Trustee within 60 days thereof.
70
<PAGE>
Within five Business Days after the occurrence of any Event of Default
actually known to the Property Trustee, the Property Trustee shall transmit
notice of such Event of Default to the holders of the Trust Preferred
Securities, the Administrative Trustees and First Interstate, as Depositor,
unless such Event of Default shall have been cured or waived. First Interstate
as Depositor and the Administrative Trustees are required to file annually with
the Property Trustee a certificate as to whether they are in compliance with all
the conditions and covenants applicable to them under the Trust Agreement.
If a Debenture Event of Default has occurred and is continuing, the Trust
Preferred Securities shall have a preference over the Common Securities upon
dissolution of FIB Capital as described above. See "Liquidation Distribution
upon Dissolution." Upon a Debenture Event of Default, unless the principal of
all the Junior Subordinated Debentures has already become due and payable,
either the Property Trustee or the holders of not less than 25% in aggregate
principal amount of the Junior Subordinated Debentures then outstanding may
declare all of the Junior Subordinated Debentures to be due and payable
immediately by giving notice in writing to First Interstate (and to the Property
Trustee, if notice is given by holders of the Junior Subordinated Debentures).
If the Property Trustee or the holders of the Junior Subordinated Debentures
fail to declare the principal of all of the Junior Subordinated Debentures due
and payable upon a Debenture Event of Default, the holders of at least 25% in
Liquidation Amount of the Trust Preferred Securities then outstanding shall have
the right to declare the Junior Subordinated Debentures immediately due and
payable. In either event, payment of principal and interest on the Junior
Subordinated Debentures shall remain subordinated to the extent provided in the
Indenture. In addition, holders of the Trust Preferred Securities have the right
in certain circumstances to bring a Direct Action (as defined herein). See
"Description of Junior Subordinated Debentures--Enforcement of Certain Rights by
Holders of Trust Preferred Securities."
REMOVAL OF TRUSTEES
Unless a Debenture Event of Default shall have occurred and be continuing,
any of the Property Trustee, the Delaware Trustee or the Administrative Trustees
may be removed at any time by the holder of the Common Securities. If a
Debenture Event of Default has occurred and is continuing, the Property Trustee
and the Delaware Trustee may be removed at such time by the holders of a
majority in Liquidation Amount of the outstanding Trust Preferred Securities. In
no event will the holders of the Trust Preferred Securities have the right to
vote to appoint, remove or replace the Administrative Trustees, which voting
rights are vested exclusively in First Interstate as the holder of the Common
Securities. No resignation or removal of a Trustee and no appointment of a
successor trustee shall be effective until the acceptance of appointment by the
successor trustee in accordance with the provisions of the Trust Agreement.
CO-TRUSTEES AND SEPARATE PROPERTY TRUSTEE
Unless an Event of Default shall have occurred and be continuing, at any
time or times, for the purpose of meeting the legal requirements of the Trust
Indenture Act or of any jurisdiction in which any part of Trust property may at
the time be located, First Interstate, as the holder of the Common Securities
and the Administrative Trustees shall have power to appoint one or more persons
either to act as a co-trustee, jointly with the Property Trustee, of all or any
part of such Trust property, or to act as separate trustee of any such property,
in either case with such powers as may be provided in the instrument of
appointment, and to vest in such person or persons in such capacity any
property, title, right or power deemed necessary or desirable, subject to the
provisions of the Trust Agreement. In case a Debenture Event of Default has
occurred and is continuing, the Property Trustee alone shall have power to make
such appointment.
MERGER OR CONSOLIDATION OF TRUSTEES
Any Person (as defined in the Trust Agreement) into which the Property
Trustee, the Delaware Trustee or any Administrative Trustee that is not a
natural person may be merged or converted or with which it may be consolidated,
or any Person resulting from any merger, conversion or consolidation to
71
<PAGE>
which such Issuer Trustee shall be a party, or any person succeeding to all or
substantially all the corporate trust business of such Issuer Trustee, shall be
the successor of such Issuer Trustee under the Trust Agreement, provided such
person shall be otherwise qualified and eligible.
MERGERS, CONSOLIDATIONS, AMALGAMATIONS OR REPLACEMENTS OF FIB CAPITAL
FIB Capital may not merge with or into, consolidate, amalgamate, or be
replaced by, or convey, transfer or lease its properties and assets
substantially as an entirety to any corporation or other Person, except as
described below or as described in "Liquidation Distribution upon Dissolution"
herein. FIB Capital may, at the request of First Interstate, with the consent of
the Administrative Trustees and without the consent of the holders of the Trust
Preferred Securities, merge with or into, consolidate, amalgamate, or be
replaced by or convey, transfer or lease its properties and assets substantially
as an entirety to a trust organized as such under the laws of any state;
provided, that (i) such successor entity either (a) expressly assumes all of the
obligations of FIB Capital with respect to the Trust Preferred Securities or (b)
substitutes for the Trust Preferred Securities other securities having
substantially the same terms as the Trust Preferred Securities (the "Successor
Securities") so long as the Successor Securities rank the same as the Trust
Preferred Securities rank in priority with respect to distributions and payments
upon liquidation, redemption and otherwise, (ii) First Interstate expressly
appoints a trustee of such successor entity possessing the same powers and
duties as the Property Trustee as the holder of the Junior Subordinated
Debentures, (iii) the Successor Securities are listed, or any Successor
Securities will be listed upon notification of issuance, on any national
securities exchange or other organization on which the Trust Preferred
Securities are then listed, if any, (iv) such merger, consolidation,
amalgamation, conveyance, transfer or lease does not cause the Trust Preferred
Securities to be downgraded by any nationally recognized statistical rating
organization which gives ratings to the Trust Preferred Securities; (v) such
merger, consolidation, amalgamation, replacement, conveyance, transfer or lease
does not adversely affect the rights, preferences and privileges of the holders
of the Trust Preferred Securities (including any Successor Securities) in any
material respect, (vi) such successor entity has a purpose substantially
identical to that of FIB Capital, (vii) the Successor Securities will be listed
or traded on any national securities exchange or other organization on which the
Trust Preferred Securities may then be listed, (viii) prior to such merger,
consolidation, amalgamation, replacement, conveyance, transfer or lease, First
Interstate has received an opinion from independent counsel to FIB Capital
experienced in such matters to the effect that (a) such merger, consolidation,
amalgamation, replacement, conveyance, transfer or lease does not adversely
affect the rights, preferences and privileges of the holders of the Trust
Preferred Securities (including any Successor Securities) in any material
respect, and (b) following such merger, consolidation, amalgamation,
replacement, conveyance, transfer or lease, neither FIB Capital nor such
successor entity will be required to register as an investment company under the
Investment Company Act and (ix) First Interstate or any permitted successor or
designee owns all of the common securities of such successor entity and
guarantees the obligations of such successor entity under the Successor
Securities at least to the extent provided by the Guarantee. Notwithstanding the
foregoing, FIB Capital shall not, except with the consent of holders of 100% in
Liquidation Amount of the Trust Preferred Securities, consolidate, amalgamate,
merge with or into, or be replaced by or convey, transfer or lease its
properties and assets substantially as an entirety to any other entity or permit
any other entity to consolidate, amalgamate, merge with or into, or replace it
if such consolidation, amalgamation, merger, replacement, conveyance, transfer
or lease would cause FIB Capital or the successor entity to be classified as
other than a grantor trust for United States federal income tax purposes.
VOTING RIGHTS; AMENDMENT OF THE TRUST AGREEMENT
Except as provided below and under "Description of Guarantee--Amendments and
Assignment" and as otherwise required by law and the Trust Agreement, the
holders of the Trust Preferred Securities will have no voting rights.
72
<PAGE>
The Trust Agreement may be amended from time to time by First Interstate,
the Property Trustee and the Administrative Trustees, without the consent of the
holders of the Trust Securities, (i) to cure any ambiguity, correct or
supplement any provisions in the Trust Agreement that may be inconsistent with
any other provision, or to make any other provisions with respect to matters or
questions arising under the Trust Agreement, which shall not be inconsistent
with the other provisions of the Trust Agreement, or (ii) to modify, eliminate
or add to any provisions of the Trust Agreement to such extent as shall be
necessary to ensure that FIB Capital will be classified for United States
federal income tax purposes as a grantor trust at all times that any Trust
Securities are outstanding or to ensure that FIB Capital will not be required to
register as an "investment company" under the Investment Company Act; provided,
however, that in the case of clause (i), such action shall not adversely affect
in any material respect the interests of any holder of Trust Securities, and any
such amendments of the Trust Agreement shall become effective when notice
thereof is given to the holders of the Trust Securities. The Trust Agreement may
be amended by the Issuer Trustees and First Interstate with (i) the consent of
holders representing not less than a majority of the aggregate Liquidation
Amount of the outstanding Trust Securities, and (ii) receipt by the Issuer
Trustees of an opinion of counsel to the effect that such amendment or the
exercise of any power granted to the Issuer Trustees in accordance with such
amendment will not affect FIB Capital's status as a grantor trust for United
States federal income tax purposes or FIB Capital's exemption from status as an
"investment company" under the Investment Company Act; provided that without the
consent of each holder of Trust Securities, the Trust Agreement may not be
amended to (i) change the amount or timing of any Distribution on the Trust
Securities or otherwise adversely affect the amount of any Distribution required
to be made in respect of the Trust Securities as of a specified date or (ii)
restrict the right of a holder of Trust Securities to institute suit for the
enforcement of any such payment on or after such date.
So long as any Junior Subordinated Debentures are held by the Property
Trustee, the Issuer Trustees shall not (i) direct the time, method and place of
conducting any proceeding for any remedy available to the Indenture Trustee, or
executing any trust or power conferred on the Property Trustee with respect to
the Junior Subordinated Debentures, (ii) waive any past default that is waivable
under the Indenture, (iii) exercise any right to rescind or annul a declaration
that the principal of all the Junior Subordinated Debentures shall be due and
payable or (iv) consent to any amendment, modification or termination of the
Indenture or the Junior Subordinated Debentures, where such consent shall be
required, without, in each case, obtaining the prior approval of the holders of
a majority in aggregate Liquidation Amount of all outstanding Trust Preferred
Securities; provided, however, that where a consent under the Indenture would
require the consent of each holder of Junior Subordinated Debentures affected
thereby, no such consent shall be given by the Property Trustee without the
prior consent of each holder of the Trust Preferred Securities. The Issuer
Trustees shall not revoke any action previously authorized or approved by a vote
of the holders of the Trust Preferred Securities except by subsequent vote of
the holders of the Trust Preferred Securities. The Property Trustee shall notify
each holder of the Trust Preferred Securities of any notice of default with
respect to the Junior Subordinated Debentures. In addition to obtaining the
foregoing approvals of such holders of the Trust Preferred Securities, prior to
taking any of the foregoing actions, the Issuer Trustees shall obtain an opinion
of counsel experienced in such matters to the effect that FIB Capital will not
be classified as other than a grantor trust for United States federal income tax
purposes.
Any required approval of holders of the Trust Preferred Securities may be
given at a meeting of holders of Trust Preferred Securities convened for such
purpose or pursuant to written consent. The Property Trustee will cause a notice
of any meeting at which holders of the Trust Preferred Securities are entitled
to vote, or of any matter upon which action by written consent of such holders
is to be taken, to be given to each holder of record of the Trust Preferred
Securities in the manner set forth in the Trust Agreement.
No vote or consent of the holders of the Trust Preferred Securities will be
required for FIB Capital to redeem and cancel the Trust Preferred Securities in
accordance with the Trust Agreement.
73
<PAGE>
Notwithstanding that holders of the Trust Preferred Securities are entitled
to vote or consent under any of the circumstances described above, any of the
Trust Preferred Securities that are owned by First Interstate, the Trustees or
any affiliate of First Interstate or any Trustee, shall, for purposes of such
vote or consent, be treated as if they were not outstanding.
GLOBAL TRUST PREFERRED SECURITIES
The Trust Preferred Securities will be represented by one or more global
certificates registered in the name of DTC or its nominee ("Global Trust
Preferred Security"). Beneficial interests in the Trust Preferred Securities
will be shown on, and transfers thereof will be effected only through, records
maintained by participants in DTC. Except as described below, Trust Preferred
Securities in certificated form will not be issued in exchange for the global
certificates. See "Book-Entry Issuance."
A Global Trust Preferred Security shall be exchangeable for Trust Preferred
Securities registered in the names of persons other than DTC or its nominee only
if (i) DTC notifies First Interstate that it is unwilling or unable to continue
as a depositary for such Global Trust Preferred Security and no successor
depositary shall have been appointed, or if at any time DTC ceases to be a
clearing agency registered under the Exchange Act, at a time when DTC is
required to be so registered to act as such depositary, (ii) First Interstate in
its sole discretion determines that such Global Trust Preferred Security shall
be so exchangeable, or (iii) there shall have occurred and be continuing a
Debenture Event of Default. Any Global Trust Preferred Security that is
exchangeable pursuant to the preceding sentence shall be exchangeable for
definitive certificates registered in such names as DTC shall direct. It is
expected that such instructions will be based upon directions received by DTC
with respect to ownership of beneficial interests in such Global Trust Preferred
Security. If Trust Preferred Securities are issued in definitive form, such
Trust Preferred Securities will be in denominations of $25 and integral
multiples thereof and may be transferred or exchanged at the offices described
below.
Unless and until it is exchanged in whole or in part for the individual
Trust Preferred Securities represented thereby, a Global Trust Preferred
Security may not be transferred except as a whole by DTC to a nominee of DTC or
by a nominee of DTC to DTC or another nominee of DTC or by DTC or any nominee to
a successor depository or any nominee of such successor.
Payments on Trust Preferred Securities represented by a Global Trust
Preferred Security will be made to DTC, as the depositary for the Trust
Preferred Securities. If Trust Preferred Securities are issued in definitive
form, Distributions will be payable, the transfer of the Trust Preferred
Securities will be registrable, and Trust Preferred Securities will be
exchangeable for Trust Preferred Securities of other denominations of a like
aggregate Liquidation Amount, at the corporate office of the Property Trustee,
or at the offices of any paying agent or transfer agent appointed by the
Administrative Trustees, provided that payment of any Distribution may be made
at the option of the Administrative Trustees by check mailed to the address of
the persons entitled thereto or by wire transfer. In addition, if the Trust
Preferred Securities are issued in certificated form, the record dates for
payment of Distributions will be the first day of the month in which the
relevant Distribution Date occurs. For a description of the terms of the
depositary arrangements relating to payments, transfers, voting rights,
redemptions and other notices and other matters, see "Book-Entry Issuance."
Upon the issuance of a Global Trust Preferred Security and the deposit of
such Global Trust Preferred Security with or on behalf of DTC, DTC or its
nominee will credit, on its book-entry registration and transfer system, the
respective aggregate Liquidation Amounts of the individual Trust Preferred
Securities represented by such Global Trust Preferred Securities to the accounts
of record holders thereof (the "Participants"). Such accounts shall be
designated by the dealers, underwriters or agents with respect to such Trust
Preferred Securities. Ownership of beneficial interests in a Global Trust
Preferred Security will be limited to Participants or persons that may hold
interests through Participants. Ownership of beneficial interests in such Global
Trust Preferred Security will be shown on and the transfer of that ownership
will be effected only through, records maintained by DTC or its nominee (with
respect to interests of Participants)
74
<PAGE>
and the records of Participants (with respect to interests of persons who hold
through Participants). The laws of some states require that certain purchasers
of securities take physical delivery of such securities in definitive form. Such
limits and such laws may impair the ability to transfer beneficial interests in
a Global Trust Preferred Security.
So long as DTC for a Global Trust Preferred Security, or its nominee, is the
registered owners of such Global Trust Preferred Security, DTC or such nominee,
as the case may be, will be considered the sole owner or holder of the Trust
Preferred Securities represented by such Global Trust Preferred Security for all
purposes under the Trust Agreement governing such Trust Preferred Securities.
Except as provided below, owners of beneficial interests in a Global Trust
Preferred Security will not be entitled to have any of the individual Trust
Preferred Securities represented by such Global Trust Preferred Security
registered in their names, will not receive or be entitled to receive physical
delivery of any such Trust Preferred Securities in definitive form and will not
be considered the owners or holders thereof under the Trust Agreement.
None of First Interstate, the Property Trustee, any Paying Agent (as defined
below), or the Securities Registrar (defined below) for such Trust Preferred
Securities will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests of the Global Trust Preferred Security representing such Trust
Preferred Securities or for maintaining supervising or reviewing any records
relating to such beneficial ownership interests.
First Interstate expects that DTC or its nominee, upon receipt of any
payment of the Liquidation Amount or Distributions in respect of a permanent
Global Trust Preferred Security immediately will credit Participants' accounts
with payments in amounts proportionate to their respective beneficial interest
in the aggregate Liquidation Amount of such Global Trust Preferred Security as
shown on the records of DTC or its nominee. First Interstate also expects that
payments by Participants to owners of beneficial interests in such Global Trust
Preferred Security held through such Participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in "street name."
Such payments will be the responsibility of such Participants.
If DTC or its nominee is at any time unwilling, unable or ineligible to
continue as depositary and a successor depositary is not appointed by First
Interstate within 90 days, FIB Capital will issue individual Trust Preferred
Securities in exchange for the Global Trust Preferred Security. In addition, FIB
Capital may at any time and in its sole discretion, subject to any limitations
described herein relating to such Trust Preferred Securities, determine not to
have any Trust Preferred Securities represented by one or more Global Trust
Preferred Securities and, in such event, will issue individual Trust Preferred
Securities in exchange for the Global Trust Preferred Security or Securities
representing the Trust Preferred Securities. Further, if FIB Capital so
specifies with respect to the Trust Preferred Securities, an owner of a
beneficial interest in a Global Trust Preferred Security representing Trust
Preferred Securities may, on terms acceptable to First Interstate, the Property
Trustee and DTC, receive individual Trust Preferred Securities in exchange for
such beneficial interests, subject to any limitations described herein. In any
such instance, an owner of a beneficial interest in a Global Trust Preferred
Security will be entitled to physical delivery of individual Trust Preferred
Securities represented by such Global Trust Preferred Security equal in
Liquidation Amount to such beneficial interest and to have such Trust Preferred
Securities registered in its name. Individual Trust Preferred Securities so
issued will be issued in denominations, unless otherwise specified by FIB
Capital, of $25 and integral multiples thereof.
PAYMENT AND PAYING AGENCY
Payments in respect of the Trust Preferred Securities shall be made to DTC,
which shall credit the relevant accounts at DTC on the applicable Distribution
Dates or, if any of the Trust Preferred Securities are not held by DTC, such
payments shall be made by check mailed to the address of the holder entitled
thereto as such address shall appear on the Register. The paying agent (the
"Paying Agent") shall initially be the Property Trustee and any co-paying agent
chosen by the Property Trustee and acceptable to the
75
<PAGE>
Administrative Trustees and First Interstate. The Paying Agent shall be
permitted to resign as Paying Agent upon 30 days' written notice to the Property
Trustee. If the Property Trustee shall no longer be the Paying Agent, the
Administrative Trustees shall appoint a successor (which shall be a bank or
trust company acceptable to the Administrative Trustees and First Interstate) to
act as Paying Agent.
REGISTRAR AND TRANSFER AGENT
The Property Trustee will act as registrar and transfer agent for the Trust
Preferred Securities. Registration of transfers of the Trust Preferred
Securities will be effected without charge by or on behalf of FIB Capital, but
upon payment of any tax or other governmental charges that may be imposed in
connection with any transfer or exchange. FIB Capital will not be required to
register or cause to be registered the transfer of the Trust Preferred
Securities after such Trust Preferred Securities have been called for
redemption.
INFORMATION CONCERNING THE PROPERTY TRUSTEE
The Property Trustee, other than upon the occurrence and during the
continuance of an Event of Default, undertakes to perform only such duties as
are specifically set forth in the Trust Agreement and, after such Event of
Default, must exercise the same degree of care and skill as a prudent person
would exercise or use in the conduct of his or her own affairs. Subject to this
provision, the Property Trustee is under no obligation to exercise any of the
powers vested in it by the Trust Agreement at the request of any holder of Trust
Preferred Securities unless it is offered reasonable indemnity against the
costs, expenses and liabilities that might be incurred thereby. If no Event of
Default has occurred and is continuing and the Property Trustee is required to
decide between alternative causes of action, construe ambiguous provisions in
the Trust Agreement or is unsure of the application of any provision of the
Trust Agreement, and the matter is not one on which holders of the Trust
Preferred Securities are entitled under the Trust Agreement to vote, then the
Property Trustee shall take such action as is directed by First Interstate and
if not so directed, shall take such action as it deems advisable and in the best
interests of the holders of the Trust Securities and will have no liability
except for its own bad faith, negligence or willful misconduct.
MISCELLANEOUS
The Administrative Trustees are authorized and directed to conduct the
affairs of and to operate FIB Capital in such a way that FIB Capital will not be
deemed to be an "investment company" required to be registered under the
Investment Company Act or classified as an association taxable as a corporation
for United States federal income tax purposes and so that the Junior
Subordinated Debentures will be treated as indebtedness of First Interstate for
United States federal income tax purposes. In this connection, First Interstate
and the Administrative Trustees are authorized to take any action, not
inconsistent with applicable law, the certificate of trust of FIB Capital or the
Trust Agreement, that First Interstate and the Administrative Trustees determine
in their discretion to be necessary or desirable for such purposes, as long as
such action does not materially adversely affect the interests of the holders of
the Trust Preferred Securities. Holders of the Trust Preferred Securities have
no preemptive or similar rights.
FIB Capital may not borrow money or issue debt or mortgage or pledge any of
its assets.
76
<PAGE>
DESCRIPTION OF JUNIOR SUBORDINATED DEBENTURES
The Junior Subordinated Debentures will be issued under the Indenture. The
following summary of the terms and provisions of the Junior Subordinated
Debentures and the Indenture does not purport to be complete and is subject to,
and is qualified in its entirety by reference to, the Indenture, which has been
filed as an exhibit to the Registration Statement of which this Prospectus forms
a part, and to the Trust Indenture Act. The Indenture is qualified under the
Trust Indenture Act. Whenever particular defined terms of the Indenture are
referred to herein, such defined terms are incorporated herein or therein by
reference.
Concurrently with the issuance of the Trust Preferred Securities, FIB
Capital will invest the proceeds thereof, together with the consideration paid
by First Interstate for the Common Securities, in Junior Subordinated Debentures
issued by First Interstate. The Junior Subordinated Debentures will be issued as
unsecured debt under the Indenture.
GENERAL
The Junior Subordinated Debentures will bear interest at the annual rate of
8 5/8% of the principal amount thereof, payable quarterly in arrears on the last
day of March, June, September and December of each year (each, an "Interest
Payment Date"), commencing December 31, 1997, to the person in whose name each
Junior Subordinated Debenture is registered, subject to certain exceptions, at
the close of business on the Business Day next preceding such Interest Payment
Date. Notwithstanding the above, if either the (i) Junior Subordinated
Debentures are held by the Property Trustee and the Trust Preferred Securities
are no longer in book-entry only form or (ii) the Junior Subordinated Debentures
are not represented by a Global Subordinated Debenture (as defined herein), the
record date for such payment shall be the 15th day of the month in which such
payment is made. The amount of each interest payment due with respect to the
Junior Subordinated Debentures will include amounts accrued to but excluding the
date the interest payment is due. It is anticipated that, until the dissolution,
if any, of FIB Capital, each Junior Subordinated Debenture will be held in the
name of the Property Trustee in trust for the benefit of the holders of the
Trust Preferred Securities. The amount of interest payable for any period will
be computed on the basis of a 360-day year of twelve 30-day months. If any date
on which interest is payable on the Junior Subordinated Debentures is not a
Business Day, then payment of the interest payable on such date will be made on
the next Business Day (and without any interest or other payment in respect of
any such delay), except that, if such Business Day is in the next succeeding
calendar year, such payment shall be made on the immediately preceding Business
Day, in each case with the same force and effect as if made on the date such
payment was originally payable. Accrued interest that is not paid on the
applicable Interest Payment Date will bear additional interest on the amount
thereof (to the extent permitted by law) at the rate per annum of 8 5/8%
thereof, compounded quarterly. The term "interest" as used herein shall include
quarterly interest payments, interest on quarterly interest payments not paid on
the applicable Interest Payment Date and Additional Sums, as applicable.
The Junior Subordinated Debentures will mature on December 1, 2027. Such
date may be shortened once at any time by First Interstate to any date not
earlier than December 1, 2002, subject to First Interstate having received prior
approval of the Federal Reserve if then required under applicable capital
guidelines or policies of the Federal Reserve. If First Interstate elects to
shorten the Stated Maturity, it shall give notice to the Indenture Trustee, and
the Indenture Trustee shall give notice of such shortening to the holders of the
Junior Subordinated Debentures no less than 90 days prior to the effectiveness
thereof.
The Junior Subordinated Debentures will be unsecured and will rank junior
and be subordinate in right of payment to all Senior and Subordinated Debt of
First Interstate (as defined herein). Because First Interstate is a holding
company, the right of First Interstate to participate in any distribution of
assets of any of the subsidiaries, including the Banks, upon any such
subsidiaries' liquidation or reorganization or otherwise (and thus the ability
of holders of the Trust Preferred Securities to benefit indirectly from such
77
<PAGE>
distribution), is subject to the prior claims of creditors of that subsidiary,
except to the extent that First Interstate may itself be recognized as a
creditor of that subsidiary. Accordingly, the Junior Subordinated Debentures
will be effectively subordinated to all existing and future liabilities of the
subsidiaries, and holders of Junior Subordinated Debentures should look only to
the assets of First Interstate for payments on the Junior Subordinated
Debentures. The Indenture does not limit the incurrence or issuance of other
secured or unsecured debt of First Interstate, including Senior and Subordinated
Debt, whether under the Indenture or any existing or other indenture that First
Interstate may enter into in the future or otherwise. See "--Subordination."
OPTION TO DEFER INTEREST PAYMENT PERIOD
So long as no Debenture Event of Default has occurred and is continuing,
First Interstate has the right under the Indenture at any time during the term
of the Junior Subordinated Debentures to defer the payment of interest at any
time or from time to time for a period not exceeding 20 consecutive quarters
(each such period an "Extension Period"), provided that no Extension Period may
extend beyond the Stated Maturity. At the end of such Extension Period, First
Interstate must pay all interest then accrued and unpaid (together with interest
thereon at the annual rate of 8 5/8%, compounded quarterly, to the extent
permitted by applicable law). During an Extension Period, interest will continue
to accrue and holders of Junior Subordinated Debentures will be required to
accrue interest income for United States federal income tax purposes. See
"Certain Federal Income Tax Consequences--Interest Income and Original Issue
Discount."
During any such Extension Period, First Interstate may not (i) declare or
pay any dividends or distributions on, or redeem, purchase, acquire or make a
liquidation payment with respect to, any of First Interstate's capital stock or
(ii) make any payment of principal, interest or premium, if any, on or repay,
repurchase or redeem any debt securities of First Interstate (including other
Junior Subordinated Debentures) that rank PARI PASSU with or junior in interest
to the Junior Subordinated Debentures or (iii) make any guarantee payments with
respect to any guarantee by First Interstate of the debt securities of any Bank
if such guarantee ranks PARI PASSU with or junior in interest to the Junior
Subordinated Debentures (other than (a) dividends or distributions in Common
Stock, (b) any declaration of a dividend in connection with the implementation
of a stockholders' rights plan, or the issuance of stock under any such plan in
the future, or the redemption or repurchase of any such rights pursuant thereto,
(c) payments under the Guarantee, and (d) purchases of Common Stock related to
the issuance of Common Stock or rights under any of First Interstate's benefit
plans for its directors, officers or employees). Prior to the termination of any
such Extension Period, First Interstate may further extend such Extension
Period, provided that such extension does not cause such Extension Period to
exceed 20 consecutive quarters or extend beyond the Stated Maturity. Upon the
termination of any such Extension Period and the payment of all amounts then due
on any Interest Payment Date, First Interstate may elect to begin a new
Extension Period subject to the above requirements. No interest shall be due and
payable during an Extension Period, except at the end thereof. First Interstate
must give the Property Trustee, the Administrative Trustees and the Indenture
Trustee notice of its election of any Extension Period at least one Business Day
prior to the earlier of (i) the date the Distributions on the Trust Preferred
Securities would have been payable except for the election to begin or extend
such Extension Period or (ii) the date the Administrative Trustees are required
to give notice to the Nasdaq National Market or any applicable stock exchange or
automated quotation system on which the Trust Preferred Securities are then
listed or quoted or to the holders of the Trust Preferred Securities of the
record date or the date such Distributions are payable, but in any event not
less than one Business Day prior to such record date. The Indenture Trustee
shall give notice of First Interstate's election to begin or extend a new
Extension Period to the holders of the Trust Preferred Securities. There is no
limitation on the number of times that First Interstate may elect to begin an
Extension Period.
78
<PAGE>
Distributions on the Trust Preferred Securities will be deferred by FIB
Capital during any such Extension Period. See "Description of the Trust
Preferred Securities--Distributions." For a description of certain federal
income tax consequences and special considerations applicable to any such Junior
Subordinated Debentures, see "Certain Federal Income Tax Consequences."
ADDITIONAL SUMS
If FIB Capital is required to pay any additional taxes, duties or other
governmental charges as a result of a Tax Event, First Interstate will pay as
Additional Sums on the Junior Subordinated Debentures such amounts as shall be
required so that the Distributions payable by FIB Capital shall not be reduced
as a result of any such additional taxes, duties or other governmental charges.
REDEMPTION
Subject to First Interstate having received prior approval of the Federal
Reserve, if then required under applicable capital guidelines or policies of the
Federal Reserve, the Junior Subordinated Debentures are redeemable prior to
maturity at the option of First Interstate (i) on or after December 1, 2002, in
whole at any time or in part from time to time, or (ii) at any time in whole
(but not in part), upon the occurrence and during the continuance of a Tax
Event, an Investment Company Event or a Capital Treatment Event, in each case at
a redemption price equal to the accrued and unpaid interest on the Junior
Subordinated Debentures so redeemed to the date fixed for redemption, plus 100%
of the principal amount thereof.
Notice of any redemption will be mailed at least 30 but not more than 60
days before the redemption date to each holder of Junior Subordinated Debentures
to be redeemed at such holder's registered address. Unless First Interstate
defaults in payment of the redemption price, on and after the redemption date
interest ceases to accrue on such Junior Subordinated Debentures or portions
thereof called for redemption.
If FIB Capital is required to pay additional taxes, duties or other
governmental charges as a result of a Tax Event, First Interstate will pay as
additional amounts on the Junior Subordinated Debentures the Additional Sums.
The Junior Subordinated Debentures will not be subject to any sinking fund.
DISTRIBUTION UPON LIQUIDATION
As described under "Description of the Trust Preferred
Securities--Liquidation Distribution Upon Dissolution," under certain
circumstances involving the dissolution of FIB Capital, the Junior Subordinated
Debentures may be distributed to the holders of the Trust Preferred Securities
in liquidation of FIB Capital after satisfaction of liabilities to creditors of
FIB Capital as provided by applicable law. If distributed to holders of the
Trust Preferred Securities in liquidation, the Junior Subordinated Debentures
will initially be issued in the form of one or more global securities and DTC,
or any successor depositary for the Trust Preferred Securities, will act as
depositary for the Junior Subordinated Debentures. It is anticipated that the
depositary arrangements for the Junior Subordinated Debentures would be
substantially identical to those in effect for the Trust Preferred Securities.
If the Junior Subordinated Debentures are distributed to the holders of Trust
Preferred Securities upon the liquidation of FIB Capital, First Interstate will
use its best efforts to list the Junior Subordinated Debentures on the Nasdaq
National Market or such other stock exchanges or automated quotation system, if
any, on which the Trust Preferred Securities are then listed or quoted. There
can be no assurance as to the market price of any Junior Subordinated Debentures
that may be distributed to the holders of Trust Preferred Securities.
79
<PAGE>
RESTRICTIONS ON CERTAIN PAYMENTS
If at any time (i) there shall have occurred any event of which First
Interstate has actual knowledge that (a) with the giving of notice or the lapse
of time, or both, would constitute a Debenture Event of Default and (b) in
respect of which First Interstate shall not have taken reasonable steps to cure,
(ii) First Interstate shall have given notice of its election of an Extension
Period as provided in the Indenture with respect to the Junior Subordinated
Debentures and shall not have rescinded such notice, or such Extension Period,
or any extension thereof, shall be continuing, or (iii) while the Junior
Subordinated Debentures are held by FIB Capital, First Interstate shall be in
default with respect to its payment of any obligation under the Guarantee, then
First Interstate will not (1) declare or pay any dividends or distributions on,
or redeem, purchase, acquire, or make a liquidation payment with respect to, any
of First Interstate's capital stock or (2) make any payment of principal,
interest or premium, if any, on or repay, repurchase or redeem any debt
securities of First Interstate (including other junior subordinated debentures
of like tenor to the Junior Subordinated Debentures) that rank PARI PASSU with
or junior in interest to the Junior Subordinated Debentures or make any
guarantee payments with respect to any guarantee by First Interstate of the debt
securities of any subsidiary of First Interstate if such guarantee ranks PARI
PASSU with or junior in interest to the Junior Subordinated Debentures (other
than (a) dividends or distributions in the Common Stock, (b) any declaration of
a dividend in connection with the implementation of a stockholder's rights plan,
or the issuance of stock under any such plan in the future or the redemption or
repurchase of any such rights pursuant thereto, (c) payments under the Guarantee
and (d) purchases of Common Stock related to issuance of Common Stock or rights
under any of First Interstate's benefit plans for its directors, officers or
employees).
SUBORDINATION
In the Indenture, First Interstate has covenanted and agreed that any Junior
Subordinated Debentures issued thereunder will be subordinate and junior in
right of payment to all Senior and Subordinated Debt to the extent provided in
the Indenture. Upon any payment or distribution of assets to creditors upon any
liquidation, dissolution, winding up, reorganization, assignment for the benefit
of creditors, marshaling of assets or any bankruptcy, insolvency, debt
restructuring or similar proceedings in connection with any insolvency or
bankruptcy proceeding of First Interstate, the holders of Senior and
Subordinated Debt will first be entitled to receive payment in full of principal
of all Allocable Amounts (as defined below) on such Senior and Subordinated Debt
before the holders of Junior Subordinated Debentures will be entitled to receive
or retain any payment in respect thereof.
In the event of the acceleration of the maturity of any Junior Subordinated
Debentures, the holders of all Senior and Subordinated Debt outstanding at the
time of such acceleration will first be entitled to receive payment in full of
all amounts due thereon (including any amounts due upon acceleration) before the
holders of Junior Subordinated Debentures will be entitled to receive or retain
any payment in respect of the Junior Subordinated Debentures.
No payments on account of principal or interest, if any, in respect of the
Junior Subordinated Debentures may be made if there shall have occurred and be
continuing a default in any payment with respect to Senior and Subordinated Debt
or an event of default with respect to any Senior and Subordinated Debt
resulting in the acceleration of the maturity thereof, or if any judicial
proceeding shall be pending with respect to any such default.
"Allocable Amounts," when used with respect to any Senior and Subordinated
Debt, means all amounts due or to become due on such Senior and Subordinated
Debt less, if applicable, any amount which would have been paid to, and retained
by, the holders of such Senior and Subordinated Debt (whether as a result of the
receipt of payments by the holders of such Senior and Subordinated Debt from
First Interstate or any other obligor thereon or from any holders of, or trustee
in respect of, other indebtedness that is subordinate and junior in right of
payment to such Senior and Subordinated Debt
80
<PAGE>
pursuant to any provision of such indebtedness for the payment over of amounts
received on account of such indebtedness to the holders of such Senior and
Subordinated Debt or otherwise) but for the fact that such Senior and
Subordinated Debt is subordinated or junior in right of payment to (or subject
to a requirement that amounts received on such Senior and Subordinated Debt be
paid over to obligees on) trade accounts payable or accrued liabilities arising
in the ordinary course of business.
"Debt" means, with respect to any person, whether recourse is to all or a
portion of the assets of such person and whether or not contingent: (i) every
obligation of such person for money borrowed; (ii) every obligation of such
person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of such person with
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such person; (iv) every obligation of such person issued or
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business); (v) every capital lease obligation of such person; (vi) all
indebtedness of such person whether incurred on or prior to the date of the
Indenture or thereafter incurred, for claims in respect of derivative products
including interest rate, foreign exchange rate and commodity forward contracts,
options and swaps and similar arrangements; and (vii) every obligation of the
type referred to in clauses (i) through (vi) of another person and all dividends
of another person the payment of which, in either case, such person has
guaranteed or is responsible or liable, directly or indirectly, as obligor or
otherwise.
"Senior and Subordinated Debt" means the principal of (and premium, if any)
and interest, if any (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to First Interstate
whether or not such claim for post-petition interest is allowed in such
proceeding), on Debt of First Interstate whether incurred on or prior to the
date of the Indenture or thereafter incurred, unless, in the instrument creating
or evidencing such Debt or pursuant to which such Debt is outstanding, it is
provided that such obligations are not superior in right of payment to the
Junior Subordinated Debentures or to other Debt which is PARI PASSU with, or
subordinated to, the Junior Subordinated Debentures; provided, however, that
Senior and Subordinated Debt shall not be deemed to include (i) any Debt of
First Interstate which when incurred and without respect to any election under
section 1111(b) of the United States Bankruptcy Code of 1978, as amended, was
without recourse to First Interstate, (ii) any Debt of First Interstate to any
of the Banks, (iii) Debt to any employee of First Interstate, and (iv) any other
debt securities issued pursuant to the Indenture.
The Indenture places no limitation on the amount of additional Senior and
Subordinated Debt that may be incurred by First Interstate. First Interstate
expects from time to time to incur additional indebtedness constituting Senior
and Subordinated Debt.
DENOMINATIONS, REGISTRATION AND TRANSFER
The Junior Subordinated Debentures will be represented by global
certificates registered in the name of DTC or its nominee ("Global Subordinated
Debenture"). Beneficial interests in the Junior Subordinated Debentures will be
shown on, and transfers thereof will be effected only through, records
maintained by DTC. Except as described below, Junior Subordinated Debentures in
certificated form will not be issued in exchange for the Global Subordinated
Certificates. See "Book-Entry Issuance."
Unless and until a Global Subordinated Debenture is exchanged in whole or in
part for the individual Junior Subordinated Debentures represented thereby, it
may not be transferred except as a whole by DTC to a nominee of DTC or by a
nominee of DTC to DTC or another nominee of DTC or by DTC or any nominee to a
successor depository or any nominee of such successor.
A Global Subordinated Debenture shall be exchangeable for Junior
Subordinated Debentures registered in the names of persons other than DTC or its
nominee only if (i) DTC notifies First Interstate that it is unwilling or unable
to continue as a depositary for such Global Subordinated Debenture and no
81
<PAGE>
successor depositary shall have been appointed, or if at any time DTC ceases to
be a clearing agency registered under the Exchange Act, at a time when DTC is
required to be so registered to act as such depositary, (ii) First Interstate in
its sole discretion determines that such Global Subordinated Debenture shall be
so exchangeable or (iii) there shall have occurred and be continuing a Debenture
Event of Default with respect to such Global Subordinated Debenture. Any Global
Subordinated Debenture that is exchangeable pursuant to the preceding sentence
shall be exchangeable for definitive certificates registered in such names as
DTC shall direct. It is expected that such instructions will be based upon
directions received by DTC from its participants with respect to ownership of
beneficial interests in such Global Subordinated Debenture. If Junior
Subordinated Debentures are issued in definitive form, such Junior Subordinated
Debentures will be in denominations of $25 and integral multiples thereof and
may be transferred or exchanged at the offices described below.
Payments on Junior Subordinated Debentures represented by a Global
Subordinated Debenture will be made to DTC, as the depositary for the Junior
Subordinated Debentures. If Junior Subordinated Debentures are issued in
definitive form, principal and interest will be payable, the transfer of the
Junior Subordinated Debentures will be registrable and Junior Subordinated
Debentures will be exchangeable for Junior Subordinated Debentures of other
denominations of a like aggregate principal amount, at the corporate office of
the Indenture Trustee, or at the offices of any Paying Agent or transfer agent
appointed by First Interstate, provided that payment of interest may be made at
the option of First Interstate by check mailed to the address of the persons
entitled thereto or by wire transfer. In addition, if the Junior Subordinated
Debentures are issued in certificated form, the record dates for payment of
interest will be the first day of the month in which such payment is to be made.
For a description of DTC and the terms of the depositary arrangements relating
to payments, transfers, voting rights, redemptions and other notices and other
matters, see "Book-Entry Issuance."
First Interstate will appoint the Indenture Trustee as securities registrar
under the Indenture (the "Securities Registrar"). Junior Subordinated Debentures
may be presented for exchange as provided above, and may be presented for
registration of transfer (with the form of transfer endorsed thereon, or a
satisfactory written instrument of transfer, duly executed), at the office of
the Securities Registrar. First Interstate may at any time rescind the
designation of any such transfer agent or approve a change in the location
through which any such transfer agent acts, provided that First Interstate
maintains a transfer agent in the place of payment. First Interstate may at any
time designate additional transfer agents with respect to the Junior
Subordinated Debentures.
In the event of any redemption, neither First Interstate nor the Indenture
Trustee shall be required to (i) issue, register the transfer of or exchange
Junior Subordinated Debentures during a period beginning at the opening of
business 15 days before the day of selection for redemption of Junior
Subordinated Debentures and ending at the close of business on the day of
mailing of the relevant notice of redemption or (ii) transfer or exchange any
Junior Subordinated Debentures so selected for redemption, except, in the case
of any Junior Subordinated Debentures being redeemed in part, any portion
thereof not to be redeemed.
GLOBAL SUBORDINATED DEBENTURES
Upon the issuance of the Global Subordinated Debenture and the deposit of
such Global Subordinated Debenture with or on behalf of DTC, DTC or its nominee
will credit, on its book-entry registration and transfer system, the respective
principal amounts of the individual Junior Subordinated Debentures represented
by such Global Subordinated Debenture to the accounts of persons that have
accounts with DTC ("Debenture Participants"). Ownership of beneficial interests
in a Global Subordinated Debenture will be limited to Debenture Participants or
persons that may hold interests through Debenture Participants. Ownership of
beneficial interests in such Global Subordinated Debenture will be shown on, and
the transfer of that ownership will be effected only through, records maintained
by DTC or its nominee (with respect to interests of Debenture Participants) and
the records of Debenture Participants (with respect to
82
<PAGE>
interests of persons who hold through Debenture Participants). The laws of some
states require that certain purchasers of securities take physical delivery of
such securities in definitive form. Such limits and such laws may impair the
ability to transfer beneficial interests in a Global Subordinated Debenture.
So long as DTC, or its nominee, is the registered owner of such Global
Subordinated Debenture, DTC or such nominee, as the case may be, will be
considered the sole owner or holder of the Junior Subordinated Debentures
represented by such Global Subordinated Debenture for all purposes under the
Indenture. Except as provided below, owners of beneficial interests in a Global
Subordinated Debenture will not be entitled to have any of the individual Junior
Subordinated Debentures represented by such Global Subordinated Debenture
registered in their names, will not receive or be entitled to receive physical
delivery of any such Junior Subordinated Debentures in definitive form and will
not be considered the owners or holders thereof under the Indenture.
Payments of principal of and interest on individual Junior Subordinated
Debentures represented by a Global Subordinated Debenture registered in the name
of DTC or its nominee will be made to DTC or its nominee, as the case may be, as
the registered owner of the Global Subordinated Debenture representing such
Junior Subordinated Debentures. None of First Interstate, the Indenture Trustee,
any Paying Agent or the Securities Registrar for such Junior Subordinated
Debentures will have any responsibility or liability for any aspect of the
records relating to or payments made on account of beneficial ownership
interests of the Global Subordinated Debenture representing such Junior
Subordinated Debentures or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests.
First Interstate expects that DTC or its nominee, upon receipt of any
payment of principal or interest in respect of a permanent Global Subordinated
Debenture representing the Junior Subordinated Debentures, immediately will
credit Debenture Participants' accounts with payments in amounts proportionate
to their respective beneficial interest in the principal amount of the Global
Subordinated Debenture as shown on the records of DTC or its nominee. First
Interstate also expects that payments by Debenture Participants to owners of
beneficial interests in such Global Subordinated Debenture held through such
Debenture Participants will be governed by standing instructions and customary
practices, as is now the case with securities held for the accounts of customers
in bearer form or registered in "street name." Such payments will be the
responsibility of such Debenture Participants.
If DTC is at any time unwilling, unable or ineligible to continue as
depositary and a successor depositary is not appointed by First Interstate
within 90 days, First Interstate will issue individual Junior Subordinated
Debentures in exchange for the Global Subordinated Debenture. In addition, First
Interstate may at any time and in its sole discretion, determine not to have the
Junior Subordinated Debentures represented by one or more Global Subordinated
Debentures and, in such event, will issue individual Junior Subordinated
Debentures in exchange for the Global Subordinated Debenture. Further, if First
Interstate so specifies with respect to the Junior Subordinated Debentures, an
owner of a beneficial interest in a Global Subordinated Debenture may, on terms
acceptable to First Interstate, the Indenture Trustee and DTC, receive
individual Junior Subordinated Debentures in exchange for such beneficial
interests. In any such instance, an owner of a beneficial interest in a Global
Subordinated Debenture will be entitled to physical delivery of individual
Junior Subordinated Debentures equal in principal amount to such beneficial
interest and to have such Junior Subordinated Debentures registered in its name.
Individual Junior Subordinated Debentures so issued will be issued in
denominations, unless otherwise specified by First Interstate, of $25 and
integral multiples thereof.
PAYMENT AND PAYING AGENTS
Payment of principal of and any interest on the Junior Subordinated
Debentures will be made at the office of the Indenture Trustee, except that at
the option of First Interstate payment of any interest may be made (i) except in
the case of Global Junior Subordinated Debentures, by check mailed to the
address of the person entitled thereto as such address shall appear in the
securities register or (ii) by transfer to an
83
<PAGE>
account maintained by the person entitled thereto as specified in the securities
register, provided that proper transfer instructions have been received by the
regular record date. Payment of any interest on Junior Subordinated Debentures
will be made to the person in whose name such Junior Subordinated Debenture is
registered at the close of business on the regular record date for such
interest. First Interstate may at any time designate additional Paying Agents or
rescind the designation of any Paying Agent; however, First Interstate will at
all times be required to maintain a Paying Agent in each place of payment for
the Junior Subordinated Debentures. Any moneys deposited with the Indenture
Trustee or any Paying Agent, or then held by First Interstate in trust, for the
payment of the principal of or interest on the Junior Subordinated Debentures
and remaining unclaimed for two years after such principal or interest has
become due and payable shall, at the request of First Interstate, be repaid to
First Interstate and the holder of such Junior Subordinated Debenture shall
thereafter look, as a general unsecured creditor, only to First Interstate for
payment thereof.
MODIFICATION OF INDENTURE
From time to time First Interstate and the Indenture Trustee may, without
the consent of the holders of the Junior Subordinated Debentures, amend, waive
or supplement the Indenture for specified purposes, including, among other
things, curing ambiguities, defects or inconsistencies (provided that any such
action does not materially adversely affect the interests of the holders of the
Junior Subordinated Debentures or the Trust Preferred Securities so long as they
remain outstanding) and qualifying, or maintaining the qualification of, the
Indenture under the Trust Indenture Act. The Indenture contains provisions
permitting First Interstate and the Indenture Trustee, with the consent of the
holders of not less than a majority in principal amount of the outstanding
Junior Subordinated Debentures, to modify the Indenture in a manner affecting
the rights of the holders of the Junior Subordinated Debentures; provided, that
no such modification may, without the consent of the holder of each outstanding
Junior Subordinated Debenture, (i) change the Stated Maturity of the Junior
Subordinated Debentures, or reduce the principal amount thereof, or reduce the
rate or extend the time of payment of interest thereon or (ii) reduce the
percentage of principal amount of Junior Subordinated Debentures, the holders of
which are required to consent to any such modification of the Indenture,
provided that so long as any of the Trust Preferred Securities remain
outstanding, no such modification may be made that adversely affects the holders
of such Trust Preferred Securities in any material respect, and no termination
of the Indenture may occur, and no waiver of any Debenture Event of Default or
compliance with any covenant under the Indenture may be effective, without the
prior consent of the holders of at least a majority of the aggregate Liquidation
Amount of the Trust Preferred Securities unless and until the principal of the
Junior Subordinated Debentures and all accrued and unpaid interest thereon have
been paid in full and certain other conditions are satisfied. Where a consent
under the Indenture would require the consent of each holder of Junior
Subordinated Debentures, no such consent shall be given by the Property Trustee
without the prior consent of each holder of Trust Preferred Securities.
DEBENTURE EVENTS OF DEFAULT
The Indenture provides that any one or more of the following described
events with respect to the Junior Subordinated Debentures that has occurred and
is continuing constitutes a "Debenture Event of Default" with respect to the
Junior Subordinated Debentures:
(i) failure for 30 days to pay any interest on the Junior Subordinated
Debentures when due (subject to the deferral of any due date in the case of
an Extension Period); or
(ii) failure to pay any principal on the Junior Subordinated Debentures
when due whether at maturity, upon redemption by declaration or otherwise;
or
(iii) failure to observe or perform in any material respect certain other
covenants contained in the Indenture for 90 days after written notice to
First Interstate from the Indenture Trustee or to First
84
<PAGE>
Interstate and the Indenture Trustee by the holders of at least 25% in
aggregate outstanding principal amount of the Junior Subordinated
Debentures; or
(iv) certain events in bankruptcy, insolvency or reorganization of First
Interstate.
The holders of a majority in aggregate outstanding principal amount of the
Junior Subordinated Debentures have the right to direct the time, method and
place of conducting any proceeding for any remedy available to the Indenture
Trustee. The Indenture Trustee or the holders of not less than 25% in aggregate
outstanding principal amount of the Junior Subordinated Debentures may declare
the principal due and payable immediately upon a Debenture Event of Default. If
the Indenture Trustee or such holders of Junior Subordinated Debentures fail to
make such declaration, the holders of at least 25% in aggregate Liquidation
Amount of the Trust Preferred Securities shall have such right. The holders of a
majority in aggregate outstanding principal amount of the Junior Subordinated
Debentures may annul such declaration and waive the default if the default
(other than the non-payment of the principal of the Junior Subordinated
Debentures which has become due solely by such acceleration) has been cured and
a sum sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has
been deposited with the Indenture Trustee. Should the holders of the Junior
Subordinated Debentures fail to annul such declaration and waive such default,
the holders of a majority in aggregate Liquidation Amount of the Trust Preferred
Securities shall have such right.
The holders of a majority in aggregate outstanding principal amount of
Junior Subordinated Debentures affected thereby may, on behalf of the holders of
all the Junior Subordinated Debentures, waive any past default, except a default
in the payment of principal or interest (unless such default has been cured and
a sum sufficient to pay all matured installments of interest and principal due
otherwise than by acceleration has been deposited with the Indenture Trustee) or
a default in respect of a covenant or provision which under the Indenture cannot
be modified or amended without the consent of the holder of each outstanding
Junior Subordinated Debenture.
If a Debenture Event of Default has occurred and is continuing, the Property
Trustee will have the right to declare the principal of and the interest on the
Junior Subordinated Debentures, and any other amounts payable under the
Indenture, to be forthwith due and payable and to enforce its other rights as a
creditor with respect to the Junior Subordinated Debentures.
First Interstate is required to file annually with the Indenture Trustee a
certificate as to whether First Interstate is in compliance with all the
conditions and covenants applicable to it under the Indenture.
ENFORCEMENT OF CERTAIN RIGHTS BY HOLDERS OF TRUST PREFERRED SECURITIES
If a Debenture Event of Default has occurred and is continuing and is
attributable to the failure of First Interstate to pay interest or principal on
the Junior Subordinated Debentures on the date such interest or principal is
otherwise payable, a holder of Trust Preferred Securities may institute a legal
proceeding directly against First Interstate for enforcement of payment to such
holder of the principal of or interest on such Junior Subordinated Debentures
having a principal amount equal to the aggregate Liquidation Amount of the Trust
Preferred Securities of such holder ("Direct Action"). First Interstate may not
amend the Indenture to remove the foregoing right to bring a Direct Action
without the prior written consent of the holders of all of the Trust Preferred
Securities outstanding. If the right to bring a Direct Action is removed, FIB
Capital may become subject to the reporting obligations under the Exchange Act.
First Interstate shall have the right under the Indenture to set-off any payment
made to such holder of Trust Preferred Securities by First Interstate in
connection with a Direct Action.
The holders of the Trust Preferred Securities would not be able to exercise
directly any remedies other than those set forth in the preceding paragraph
available to the holders of the Junior Subordinated Debentures unless there
shall have been an Event of Default under the Trust Agreement. See "Description
of the Trust Preferred Securities--Events of Default; Notice."
85
<PAGE>
CONSOLIDATION, MERGER, SALE OF ASSETS AND OTHER TRANSACTIONS
The Indenture provides that First Interstate shall not consolidate with or
merge into any other Person or convey, transfer or lease its properties and
assets substantially as an entirety to any Person, and no Person shall
consolidate with or merge into First Interstate or convey, transfer or lease its
properties and assets substantially as an entirety to First Interstate, unless
(i) in case First Interstate consolidates with or merges into another Person or
conveys or transfers its properties and assets substantially as an entirety to
any Person, the successor Person is organized under the laws of the United
States or any state or the District of Columbia, and such successor Person
expressly assumes First Interstate's obligations on the Junior Subordinated
Debentures issued under the Indenture; (ii) immediately after giving effect
thereto, no Debenture Event of Default, and no event which, after notice or
lapse of time or both, would become a Debenture Event of Default, shall have
occurred and be continuing; (iii) such transaction is permitted under the Trust
Agreement and the Guarantee Agreement, and does not give rise to any breach or
violation of the Trust Agreement or Guarantee Agreement; and (iv) certain other
conditions as prescribed in the Indenture are met.
The general provisions of the Indenture do not afford holders of the Junior
Subordinated Debentures protection in the event of a highly leveraged or other
transaction involving First Interstate that may adversely affect holders of the
Junior Subordinated Debentures.
SATISFACTION AND DISCHARGE
The Indenture provides that when, among other things, all Junior
Subordinated Debentures not previously delivered to the Indenture Trustee for
cancellation (i) have become due and payable or (ii) will become due and payable
at their Stated Maturity within one year, and First Interstate deposits or
causes to be deposited with the Indenture Trustee trust funds, in trust, for the
purpose and in an amount in the currency or currencies in which the Junior
Subordinated Debentures are payable sufficient to pay and discharge the entire
indebtedness on the Junior Subordinated Debentures not previously delivered to
the Indenture Trustee for cancellation, for the principal and interest to the
date of the deposit or to the Stated Maturity, as the case may be, then the
Indenture will cease to be of further effect (except as to First Interstate's
obligations to pay all other sums due pursuant to the Indenture and to provide
the officers' certificates and opinions of counsel described therein), and First
Interstate will be deemed to have satisfied and discharged the Indenture.
COVENANTS OF FIRST INTERSTATE
First Interstate will covenant in the Indenture, as to the Junior
Subordinated Debentures, that if and so long as (i) FIB Capital is the holder of
all the Junior Subordinated Debentures, (ii) a Tax Event in respect of FIB
Capital has occurred and is continuing and (iii) First Interstate has elected,
and has not revoked such election, to pay Additional Sums (as defined under
"Description of the Trust Preferred Securities--Redemption") in respect of the
Trust Preferred Securities, First Interstate will pay to FIB Capital such
Additional Sums. First Interstate will also covenant, as to the Junior
Subordinated Debentures, (i) to maintain directly or indirectly 100% ownership
of the Common Securities, provided that certain successors which are permitted
pursuant to the Indenture may succeed to First Interstate's ownership of the
Common Securities, (ii) not to voluntarily dissolve, wind up or liquidate FIB
Capital, except upon prior approval of the Federal Reserve if then so required
under applicable capital guidelines or policies of the Federal Reserve, and
except (a) in connection with a distribution of Junior Subordinated Debentures
to the holders of the Trust Preferred Securities in liquidation of FIB Capital
or (b) in connection with certain mergers, consolidations, or amalgamations
permitted by the Trust Agreement and (iii) to use its reasonable efforts,
consistent with the terms and provisions of the Trust Agreement, to cause FIB
Capital to remain classified as a grantor trust and not as an association
taxable as a corporation for United States federal income tax purposes.
86
<PAGE>
GOVERNING LAW
The Indenture and the Junior Subordinated Debentures will be governed by and
construed in accordance with the laws of the State of Montana.
INFORMATION CONCERNING THE INDENTURE TRUSTEE
The Indenture Trustee shall have and be subject to all the duties and
responsibilities specified with respect to an indenture trustee under the Trust
Indenture Act. Subject to such provisions, the Indenture Trustee is under no
obligation to exercise any of the powers vested in it by the Indenture at the
request of any holder of Junior Subordinated Debentures, unless offered
reasonable indemnity by such holder against the costs, expenses and liabilities
which might be incurred thereby. The Indenture Trustee is not required to expend
or risk its own funds or otherwise incur personal financial liability in the
performance of its duties if the Indenture Trustee reasonably believes that
repayment or adequate indemnity is not reasonably assured.
BOOK-ENTRY ISSUANCE
The Depository Trust Company will act as securities depositary for all of
the Trust Preferred Securities and the Junior Subordinated Debentures ("DTC").
The Trust Preferred Securities and the Junior Subordinated Debentures will be
issued only as fully-registered securities registered in the name of Cede & Co.
("DTC's nominee"). One or more fully-registered Global Trust Preferred
Securities and Global Subordinated Debentures will be issued and will be
deposited with DTC.
DTC is a limited purpose trust company organized under the New York Banking
Law, a "banking organization" within the meaning of the New York Banking Law, a
member of the Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code, and a "clearing agency"
registered pursuant to the provisions of Section 17A of the Exchange Act. DTC
holds securities that its participants deposit with DTC. DTC also facilitates
the settlement among participants of securities transactions, such as transfers
and pledges, in deposited securities through electronic computerized book-entry
changes in participants' accounts, thereby eliminating the need for physical
movement of securities certificates. "Direct Participants" include securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations. DTC is owned by a number of its Direct Participants and by
the New York Stock Exchange, Inc., the American Stock Exchange, Inc., and the
National Association of Securities Dealers, Inc. Access to DTC system is also
available to others such as securities brokers and dealers, banks and trust
companies that clear through or maintain custodial relationships with Direct
Participants, either directly or indirectly ("Indirect Participants"). The rules
applicable to DTC and its participants are on file with the Commission.
Purchases of Trust Preferred Securities or Junior Subordinated Debentures
within the depositary system must be made by or through Direct Participants,
which will receive a credit for the Trust Preferred Securities or Junior
Subordinated Debentures on DTC's records. The ownership interest of each actual
purchaser of each Trust Preferred Security and each Junior Subordinated
Debenture ("Beneficial Owner") is in turn to be recorded on the Direct and
Indirect Participants' records. Beneficial Owners will not receive written
confirmation from DTC of their purchases, but Beneficial Owners are expected to
receive written confirmations providing details of the transactions, as well as
periodic statements of their holdings, from the Direct or Indirect Participants
through which the Beneficial Owners purchased Trust Preferred Securities or
Junior Subordinated Debentures. Transfers of ownership interests in the Trust
Preferred Securities or Junior Subordinated Debentures are to be accomplished by
entries made on the books of participants acting on behalf of Beneficial Owners.
Beneficial Owners will not receive certificates representing their ownership
interests in Trust Preferred Securities or Junior Subordinated Debentures,
unless use of the book-entry system for the Trust Preferred Securities or Junior
Subordinated Debentures is discontinued.
87
<PAGE>
DTC has no knowledge of the actual Beneficial Owners; DTC's records reflect
only the identity of the Direct Participants to whose accounts such Trust
Preferred Securities or Junior Subordinated Debentures are credited, which may
or may not be the Beneficial Owners. The Direct Participants will remain
responsible for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to Direct
Participants, by Direct Participants to Indirect Participants, and by Direct
Participants and Indirect Participants to Beneficial Owners and the voting
rights of Direct Participants, Indirect Participants and Beneficial Owners will
be governed by arrangements among them, subject to any statutory or regulatory
requirements as may be in effect from time to time.
Redemption notices will be sent to DTC's nominee as the registered holder of
the Trust Preferred Securities or Junior Subordinated Debentures. If less than
all of the Trust Preferred Securities or the Junior Subordinated Debentures are
being redeemed, DTC will determine by lot or pro rata the amount of the Trust
Preferred Securities of each Direct Participant to be redeemed.
Although voting with respect to the Trust Preferred Securities or the Junior
Subordinated Debentures is limited to the holders of record of the Trust
Preferred Securities or Junior Subordinated Debentures, as applicable, in those
instances in which a vote is required, neither DTC nor DTC's nominee will itself
consent or vote with respect to Trust Preferred Securities or Junior
Subordinated Debentures. Under its usual procedures, DTC would mail an omnibus
proxy (the "Omnibus Proxy") to the relevant Trustee as soon as possible after
the record date. The Omnibus Proxy assigns the DTC's nominee's consenting or
voting rights to those Direct Participants to whose accounts such Trust
Preferred Securities or Junior Subordinated Debentures are credited on the
record date (identified in a listing attached to the Omnibus Proxy).
Distribution payments on the Trust Preferred Securities or the Junior
Subordinated Debentures will be made by the relevant Trustee to DTC. DTC's
practice is to credit Direct Participants' accounts on the relevant payment date
in accordance with their respective holdings shown on DTC's records unless DTC
has reason to believe that it will not receive payments on such payment date.
Payments by Direct or Indirect Participants to Beneficial Owners will be
governed by standing instructions and customary practices and will be the
responsibility of such Direct or Indirect Participant and not of DTC, the
relevant Trustee, FIB Capital or First Interstate, subject to any statutory or
regulatory requirements as may be in effect from time to time. Payment of
Distributions to DTC is the responsibility of the relevant Trustee, disbursement
of such payments to Direct Participants is the responsibility of DTC and
disbursements of such payments to the Beneficial Owners is the responsibility of
Direct and Indirect Participants.
DTC may discontinue providing its services as securities depositary with
respect to any of the Trust Preferred Securities or the Junior Subordinated
Debentures at any time by giving reasonable notice to the relevant Trustee and
First Interstate. If a successor securities depositary is not obtained,
definitive certificates representing Trust Preferred Securities or Junior
Subordinated Debenture are required to be printed and delivered. First
Interstate, at its option, may decide to discontinue use of the system of book-
entry transfers through DTC (or a successor depositary). After a Debenture Event
of Default, the holders of a majority in liquidation preference of Trust
Preferred Securities or aggregate principal amount of Junior Subordinated
Debentures may determine to discontinue the system of book-entry transfers
through DTC. In any such event, definitive certificates representing Trust
Preferred Securities or Junior Subordinated Debentures will be printed and
delivered.
The information in this section concerning DTC and DTC's book-entry system
has been obtained from sources that FIB Capital and First Interstate believe to
be accurate, but FIB Capital and First Interstate assume no responsibility for
the accuracy thereof. Neither FIB Capital nor First Interstate has any
responsibility for the performance by DTC or its Direct or Indirect Participants
of their respective obligations as described herein or under the rules and
procedures governing their respective operations.
88
<PAGE>
DESCRIPTION OF GUARANTEE
The Guarantee Agreement will be executed and delivered by First Interstate
concurrently with the issuance of the Trust Preferred Securities for the benefit
of the holders of the Trust Preferred Securities. Wilmington Trust Company will
act as Guarantee Trustee under the Guarantee Agreement for the purposes of
compliance with the Trust Indenture Act, and the Guarantee as described in this
section will be qualified as an Indenture under the Trust Indenture Act. The
following summary of certain provisions of the Guarantee does not purport to be
complete and is subject to, and qualified in its entirety by reference to, all
of the provisions of the Guarantee Agreement, including the definitions therein
of certain terms, and the Trust Indenture Act. The form of the Guarantee has
been filed as an exhibit to the Registration Statement of which this Prospectus
forms a part. The Guarantee Trustee will hold the Guarantee for the benefit of
the holders of the Trust Preferred Securities.
GENERAL
The Guarantee will be an irrevocable guarantee on a subordinated basis of
FIB Capital's obligations under the Trust Preferred Securities, but will apply
only to the extent that FIB Capital has funds sufficient to make such payments,
and is not a guarantee of collection.
First Interstate will irrevocably agree to pay in full on a subordinated
basis, to the extent set forth herein, the Guarantee Payments (as defined below)
to the holders of the Trust Preferred Securities, as and when due, regardless of
any defense, right of set-off or counterclaim that FIB Capital may have or
assert other than the defense of payment. The following payments with respect to
the Trust Preferred Securities, to the extent not paid by or on behalf of FIB
Capital (the "Guarantee Payments"), will be subject to the Guarantee: (i) any
accumulated and unpaid Distributions required to be paid on the Trust Preferred
Securities, to the extent that FIB Capital has funds on hand available therefor
at such time, (ii) the Redemption Price with respect to any Trust Preferred
Securities called for redemption, to the extent that FIB Capital has funds on
hand available therefor at such time, and (iii) upon a voluntary or involuntary
dissolution, winding up or liquidation of FIB Capital (unless the Junior
Subordinated Debentures are distributed to holders of the Trust Preferred
Securities), the lesser of (a) the Liquidation Distribution and (b) the amount
of assets of FIB Capital remaining available for distribution to holders of
Trust Preferred Securities after satisfaction of liabilities to creditors of FIB
Capital as required by law. First Interstate's obligation to make a Guarantee
Payment may be satisfied by direct payment of the required amounts by First
Interstate to the holders of the Trust Preferred Securities or by causing FIB
Capital to pay such amounts to such holders.
If First Interstate does not make interest payments on the Junior
Subordinated Debentures held by FIB Capital, FIB Capital will not be able to pay
Distributions and will not have funds legally available therefor. The Guarantee
will rank subordinate and junior in right of payment to all Senior and
Subordinated Debt. See "Status of the Guarantee" below. Because First Interstate
is a holding company, the right of First Interstate to participate in any
distribution of assets of any Bank upon such Bank's liquidation or
reorganization or otherwise, is subject to the prior claims of creditors of that
Bank, except to the extent First Interstate may itself be recognized as a
creditor of that Bank. Accordingly, First Interstate's obligations under the
Guarantee will be effectively subordinated to all existing and future
liabilities of the Banks, and claimants should look only to the assets of First
Interstate for payments thereunder. Except as otherwise described herein, the
Guarantee does not limit the incurrence or issuance of other secured or
unsecured debt of First Interstate, including Senior and Subordinated Debt
whether under the Indenture, any other indenture that First Interstate may enter
into in the future, or otherwise.
First Interstate has, through the Guarantee, the Guarantee Agreement, the
Trust Agreement, the Junior Subordinated Debentures, the Indenture and the
Expense Agreement, taken together, fully, irrevocably and unconditionally
guaranteed all of FIB Capital's obligations under the Trust Preferred
Securities. No single document standing alone or operating in conjunction with
fewer than all of the other
89
<PAGE>
documents constitutes the Guarantee. It is only the combined operation of these
documents that has the effect of providing a full, irrevocable and unconditional
guarantee of FIB Capital's obligations under the Trust Preferred Securities. See
"Relationship Among the Trust Preferred Securities, the Junior Subordinated
Debentures and the Guarantee."
STATUS OF THE GUARANTEE
The Guarantee will constitute an unsecured obligation of First Interstate
and will rank subordinate and junior in right of payment to all Senior and
Subordinated Debt in the same manner as the Junior Subordinated Debentures.
The Guarantee will constitute a guarantee of payment and not of collection.
For example, the guaranteed party may institute a legal proceeding directly
against First Interstate to enforce its rights under the Guarantee without first
instituting a legal proceeding against any other person or entity. The Guarantee
will be held for the benefit of the holders of the Trust Preferred Securities.
The Guarantee will not be discharged except by payment of the Guarantee Payments
in full to the extent not paid by FIB Capital or upon distribution to the
holders of the Trust Preferred Securities of the Junior Subordinated Debentures
to the holders of the Trust Preferred Securities. The Guarantee does not place a
limitation on the amount of additional Senior and Subordinated Debt that may be
incurred by First Interstate. First Interstate expects from time to time to
incur additional indebtedness constituting Senior and Subordinated Debt.
AMENDMENTS AND ASSIGNMENT
Except with respect to any changes which do not materially adversely affect
the rights of holders of the Trust Preferred Securities (in which case no vote
will be required), the Guarantee Agreement may not be amended without the prior
approval of the holders of not less than a majority of the aggregate Liquidation
Amount of such outstanding Trust Preferred Securities. See "Description of the
Trust Preferred Securities--Voting Rights; Amendment of the Trust Agreement."
All guarantees and agreements contained in the Guarantee Agreement shall bind
the successors, assigns, receivers, trustees and representatives of First
Interstate and shall inure to the benefit of the holders of the Trust Preferred
Securities then outstanding.
EVENTS OF DEFAULT
An event of default under the Guarantee Agreement will occur upon the
failure of First Interstate to perform any of its payment or other obligations
thereunder. The holders of not less than a majority in aggregate Liquidation
Amount of the Trust Preferred Securities have the right to direct the time,
method and place of conducting any proceeding for any remedy available to the
Guarantee Trustee in respect of the Guarantee or to direct the exercise of any
trust or power conferred upon the Guarantee Trustee under the Guarantee
Agreement. Any holder of the Trust Preferred Securities may institute a legal
proceeding directly against First Interstate to enforce its rights under the
Guarantee without first instituting a legal proceeding against FIB Capital, the
Guarantee Trustee or any other person or entity.
First Interstate, as guarantor, is required to file annually with the
Guarantee Trustee a certificate as to whether First Interstate is in compliance
with all the conditions and covenants applicable to it under the Guarantee
Agreement.
INFORMATION CONCERNING THE GUARANTEE TRUSTEE
The Guarantee Trustee, other than during the occurrence and continuance of a
default by First Interstate in performance of the Guarantee, undertakes to
perform only such duties as are specifically set forth in the Guarantee
Agreement and, after default with respect to the Guarantee, must exercise the
same degree of care and skill as a prudent person would exercise or use in the
conduct of his or her own affairs. Subject to this provision, the Guarantee
Trustee is under no obligation to exercise any of the
90
<PAGE>
powers vested in it by the Guarantee Agreement at the request of any holder of
the Trust Preferred Securities unless it is offered reasonable indemnity against
the costs, expenses and liabilities that might be incurred thereby.
TERMINATION OF THE GUARANTEE
The Guarantee will terminate and be of no further force and effect upon full
payment of the Redemption Price, upon full payment of the amounts payable upon
liquidation of FIB Capital or upon distribution of Junior Subordinated
Debentures to the holders of the Trust Preferred Securities. The Guarantee will
continue to be effective or will be reinstated, as the case may be, if at any
time any holder of the Trust Preferred Securities must restore payment of any
sums paid under the Trust Preferred Securities or the Guarantee.
GOVERNING LAW
The Guarantee Agreement will be governed by and construed in accordance with
the laws of the State of Montana.
THE EXPENSE AGREEMENT
Pursuant to the Expense Agreement entered into by First Interstate under the
Trust Agreement, First Interstate will irrevocably and unconditionally guarantee
to each person or entity to whom FIB Capital becomes indebted or liable, the
full payment of any costs, expenses or liabilities of FIB Capital, other than
obligations of FIB Capital to pay to the holders of the Trust Preferred
Securities or other similar interests in FIB Capital of the amounts due such
holders pursuant to the terms of the Trust Preferred Securities or such other
similar interests, as the case may be.
RELATIONSHIP AMONG THE TRUST PREFERRED SECURITIES, THE
JUNIOR SUBORDINATED DEBENTURES AND THE GUARANTEE
FULL AND UNCONDITIONAL GUARANTEE
Payments of Distributions and other amounts due on the Trust Preferred
Securities (to the extent FIB Capital has funds available for the payment of
such Distributions) are irrevocably guaranteed by First Interstate as and to the
extent set forth under "Description of Guarantee." Taken together, First
Interstate's obligations under the Junior Subordinated Debentures, the
Indenture, the Trust Agreement, the Expense Agreement, the Guarantee Agreement
and the Guarantee provide, in the aggregate, a full, irrevocable and
unconditional guarantee of payments of Distributions and other amounts due on
the Trust Preferred Securities. No single document standing alone or operating
in conjunction with fewer than all of the other documents constitutes the
Guarantee. It is only the combined operation of those documents that has the
effect of providing a full, irrevocable and unconditional guarantee of FIB
Capital's obligations under the Trust Preferred Securities. If and to the extent
that First Interstate does not make payments on the Junior Subordinated
Debentures, FIB Capital will not pay Distributions or other amounts due on the
Trust Preferred Securities. The Guarantee does not cover payment of
Distributions when FIB Capital does not have sufficient funds to pay such
Distributions. In such event, the remedy of a holder of the Trust Preferred
Securities is to institute a legal proceeding directly against First Interstate
for enforcement of payment of such Distributions to such holder. The obligations
of First Interstate under the Guarantee are subordinate and junior in right of
payment to all Senior and Subordinated Debt.
SUFFICIENCY OF PAYMENTS
As long as payments of interest and other payments are made when due on the
Junior Subordinated Debentures, such payments will be sufficient to cover
Distributions and other payments due on the Trust Preferred Securities,
primarily because: (i) the aggregate principal amount of the Junior Subordinated
91
<PAGE>
Debentures will be equal to the sum of the aggregate Liquidation Amount of the
Trust Preferred Securities and Common Securities; (ii) the interest rate and
interest and other payment dates on the Junior Subordinated Debentures will
match those with respect to the Trust Preferred Securities; (iii) First
Interstate shall pay for all and any costs, expenses and liabilities of FIB
Capital except FIB Capital's obligations to holders of Trust Preferred
Securities; and (iv) the Trust Agreement further provides that FIB Capital will
not engage in any activity that is not consistent with its limited purposes.
Notwithstanding anything to the contrary in the Indenture, First Interstate
has the right to set-off any payment it is otherwise required to make thereunder
with and to the extent First Interstate has theretofore made, or is concurrently
on the date of such payment making, a payment under the Guarantee.
ENFORCEMENT RIGHTS OF HOLDERS OF THE TRUST PREFERRED SECURITIES UNDER THE
GUARANTEE
A holder of any the Trust Preferred Securities may institute a legal
proceeding directly against First Interstate to enforce its rights under the
Guarantee without first instituting a legal proceeding against the Guarantee
Trustee, FIB Capital or any other person or entity.
A default or event of default under any Senior and Subordinated Debt would
not constitute a default or Event of Default. However, in the event of payment
defaults under, or acceleration of, Senior and Subordinated Debt, the
subordination provisions of the Indenture provide that no payments may be made
in respect of the Junior Subordinated Debentures until such Senior and
Subordinated Debt has been paid in full or any payment default thereunder has
been cured or waived. Failure to make required payments on Junior Subordinated
Debentures would constitute an Event of Default.
LIMITED PURPOSE OF FIB CAPITAL
The Trust Preferred Securities evidence a beneficial interest in FIB
Capital, and FIB Capital exists for the sole purpose of issuing the Trust
Securities and investing the proceeds thereof in Junior Subordinated Debentures.
A principal difference between the rights of a holder of the Trust Preferred
Securities and a holder of a Junior Subordinated Debenture is that a holder of a
Junior Subordinated Debenture is entitled to receive from First Interstate the
principal amount of and interest accrued on Junior Subordinated Debentures held,
while a holder of the Trust Preferred Securities is entitled to receive
Distributions from FIB Capital (or from First Interstate under the Guarantee) if
and to the extent FIB Capital has funds available for the payment of such
Distributions.
RIGHTS UPON DISSOLUTION
Upon any voluntary or involuntary dissolution, winding-up or liquidation of
FIB Capital involving the liquidation of the Junior Subordinated Debentures,
after satisfaction of liabilities to creditors as provided by applicable law,
the holders of Trust Preferred Securities will be entitled to receive, out of
assets held by FIB Capital, the Liquidation Amount in cash. See "Description of
the Trust Preferred Securities-- Liquidation Distribution Upon Dissolution."
Upon any voluntary or involuntary liquidation or bankruptcy of First Interstate,
the Property Trustee, as holder of the Junior Subordinated Debentures, would be
a subordinated creditor of First Interstate, subordinated in right of payment to
all Senior and Subordinated Debt as set forth in the Indenture, but entitled to
receive payment in full of principal and interest, before any stockholders of
First Interstate receive payments or distributions. Since First Interstate is
the guarantor under the Guarantee and has agreed to pay for all costs, expenses
and liabilities of FIB Capital (other than FIB Capital's obligations to the
holders of its Trust Preferred Securities), the positions of a holder of the
Trust Preferred Securities and a holder of Junior Subordinated Debentures
relative to other creditors and to stockholders of First Interstate in the event
of liquidation or bankruptcy of First Interstate are expected to be
substantially the same.
92
<PAGE>
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
In the opinion of Holland & Hart LLP, counsel to the Company ("Counsel"),
the following summary accurately describes the material United States federal
income tax consequences that may be relevant to the purchase, ownership and
disposition of Trust Preferred Securities. Unless otherwise stated, this summary
deals only with Trust Preferred Securities held as capital assets by United
States Persons (defined below) who purchase the Trust Preferred Securities upon
original issuance at their original offering price. As used herein, a "United
States Person" means a person that is (i) a citizen or resident of the United
States, (ii) a corporation, partnership or other entity created or organized in
or under the laws of the United States or any political subdivision thereof,
(iii) an estate the income of which is subject to United States federal income
taxation regardless of its source, or (iv) a trust the income of which is
subject to United States federal income taxation regardless of its source;
provided, however, that for taxable years beginning after December 31, 1996 (or,
if a trustee so elects, for taxable years ending after August 20, 1996), a
"United States Person" shall include any trust if a court is able to exercise
primary supervision over the administration of such trust and one or more United
States fiduciaries have the authority to control all substantial decisions of
such trust. The tax treatment of holders may vary depending on their particular
situation. This summary does not address all the tax consequences that may be
relevant to a particular holder or to holders who may be subject to special tax
treatment, such as banks, real estate investment trusts, regulated investment
companies, insurance companies, dealers in securities or currencies, tax-exempt
investors or foreign investors. In addition, this summary does not include any
description of any alternative minimum tax consequences or the tax laws of any
state, local or foreign government that may be applicable to a holder of Trust
Preferred Securities. This summary is based on the Code, the Treasury
regulations promulgated thereunder (the "Regulations") and administrative and
judicial interpretations thereof, as of the date hereof, all of which are
subject to change, possibly on a retroactive basis.
The following discussion does not discuss the tax consequences that might be
relevant to persons that are not United States Persons ("non-United States
Persons"). Non-United States Persons should consult their own tax advisors as to
the specific United States federal income tax consequences of the purchase,
ownership and disposition of Trust Preferred Securities.
The authorities on which this summary is based are subject to various
interpretations and the opinions of Counsel are not binding on the Internal
Revenue Service ("Service") or the courts, either of which could take a contrary
position. Moreover, no rulings have been or will be sought from the Service with
respect to the transactions described herein. Accordingly, there can be no
assurance that the Service will not challenge the opinions expressed herein or
that a court would not sustain such a challenge. Nevertheless, Counsel has
advised that it is of the view that, if challenged, the opinions expressed
herein would be sustained by a court with jurisdiction in a properly presented
case.
HOLDERS SHOULD CONSULT THEIR OWN TAX ADVISORS WITH RESPECT TO THE TAX
CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND DISPOSITION OF THE TRUST
PREFERRED SECURITIES, INCLUDING THE TAX CONSEQUENCES UNDER STATE, LOCAL,
FOREIGN, AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN UNITED STATES
FEDERAL OR OTHER TAX LAWS. FOR A DISCUSSION OF THE POSSIBLE REDEMPTION OF THE
TRUST PREFERRED SECURITIES UPON THE OCCURRENCE OF CERTAIN TAX EVENTS, SEE
"DESCRIPTION OF THE TRUST PREFERRED SECURITIES--REDEMPTION."
CLASSIFICATION OF FIB CAPITAL
In connection with the issuance of the Trust Preferred Securities, Counsel
is of the opinion that, under current law and assuming compliance with the terms
of the Trust Agreement, and based on certain facts and assumptions, FIB Capital
will be classified as a grantor trust and not as an association taxable as a
corporation for United States federal income tax purposes. As a result, each
beneficial owner of the Trust Preferred Securities (a "Securityholder") will be
treated as owning an undivided beneficial interest in the Junior Subordinated
Debentures. Accordingly, each Securityholder will be required to include in its
gross income its pro rata share of the interest income or original issue
discount that is paid or accrued on the
93
<PAGE>
Junior Subordinated Debentures. See "Interest Income and Original Issue
Discount" herein. No amount included in income with respect to the Trust
Preferred Securities will be eligible for the dividends received deduction.
CLASSIFICATION OF THE JUNIOR SUBORDINATED DEBENTURES
The Company intends to take the position that the Junior Subordinated
Debentures will be classified for United States federal income tax purposes as
indebtedness of the Company under current law, and, by acceptance of a Trust
Preferred Security, each holder covenants to treat the Junior Subordinated
Debentures as indebtedness and the Trust Preferred Securities as evidence of an
indirect beneficial ownership interest in the Junior Subordinated Debentures. No
assurance can be given, however, that such position of the Company will not be
challenged by the Internal Revenue Service or, if challenged, that such a
challenge will not be successful. The remainder of this discussion assumes that
the Junior Subordinated Debentures will be classified for United States federal
income tax purposes as indebtedness of the Company.
INTEREST INCOME AND ORIGINAL ISSUE DISCOUNT
Except as set forth below, stated interest on the Junior Subordinated
Debentures generally will be included in income by a Securityholder at the time
such interest income is paid or accrued in accordance with such Securityholder's
regular method of tax accounting.
First Interstate believes that, under the applicable Regulations, the Junior
Subordinated Debentures will not be considered to have been issued with
"original issue discount" ("OID") within the meaning of Section 1273(a) of the
Code. If, however, First Interstate exercises its right to defer payments of
interest on the Junior Subordinated Debentures, the Junior Subordinated
Debentures will become OID instruments at such time and all Securityholders will
be required to accrue the stated interest on the Junior Subordinated Debentures
on a daily basis during the Extension Period, even though First Interstate will
not pay such interest until the end of the Extension Period, and even though
some Securityholders may use the cash method of tax accounting. Moreover,
thereafter the Junior Subordinated Debentures will be taxed as OID instruments
for as long as they remain outstanding. Thus, even after the end of the
Extension Period, all Securityholders would be required to continue to include
the stated interest on the Junior Subordinated Debentures in income on a daily
economic accrual basis, regardless of their method of tax accounting and in
advance of receipt of the cash attributable to such interest income. Under the
OID economic accrual rules, a Securityholder would accrue an amount of interest
income each year that approximates the stated interest payments called for under
the Junior Subordinated Debentures, and actual cash payments of interest on the
Junior Subordinated Debentures would not be reported separately as taxable
income.
The Regulations described above have not yet been addressed in any rulings
or other interpretations by the Service, and it is possible that the Service
could take a contrary position. If the Service were to assert successfully that
the stated interest on the Junior Subordinated Debentures was OID regardless of
whether First Interstate exercises its right to defer payments of interest on
such debentures, all Securityholders would be required to include such stated
interest in income on a daily economic accrual basis as described above.
DISTRIBUTION OF JUNIOR SUBORDINATED DEBENTURES TO HOLDERS OF TRUST PREFERRED
SECURITIES
Under current law, a distribution by FIB Capital of the Junior Subordinated
Debentures as described under the caption "Description of the Trust Preferred
Securities--Liquidation Distribution Upon Dissolution" will be non-taxable and
will result in the Securityholder receiving directly its pro rata share of the
Junior Subordinated Debentures previously held indirectly through FIB Capital,
with a holding period and aggregate tax basis equal to the holding period and
aggregate tax basis such Securityholder had in its Trust
94
<PAGE>
Preferred Securities before such distribution. If, however, the liquidation of
FIB Capital were to occur because FIB Capital is subject to United States
federal income tax with respect to income accrued or received on the Junior
Subordinated Debentures as a result of a Tax Event or otherwise, the
distribution of Junior Subordinated Debentures to Securityholders by FIB Capital
could be a taxable event to FIB Capital and each Securityholder, and a
Securityholder would recognize gain or loss as if the Securityholder had
exchanged its Trust Preferred Securities for the Junior Subordinated Debentures
it received upon the liquidation of FIB Capital. A Securityholder would
recognize interest income in respect of Junior Subordinated Debentures received
from FIB Capital in the manner described above under "Interest Income and
Original Issue Discount."
SALES OR REDEMPTION OF TRUST PREFERRED SECURITIES
Gain or loss will be recognized by a Securityholder on a sale of Trust
Preferred Securities (including a redemption for cash) in an amount equal to the
difference between the amount realized (which for this purpose, will exclude
amounts attributable to accrued interest or OID not previously included in
income) and the Securityholder's adjusted tax basis in the Trust Preferred
Securities sold or so redeemed. Gain or loss recognized by a Securityholder on
Trust Preferred Securities will generally be taxable as short-term, mid-term or
long-term capital gain or loss depending on whether the Trust Preferred
Securities have been held for less than 12 months, 12 months or more but less
than 18 months, or for 18 months or more, respectively. Amounts attributable to
accrued interest with respect to a Securityholder's pro rata share of the Junior
Subordinated Debentures not previously included in income will be taxable as
ordinary income.
BACKUP WITHHOLDING TAX AND INFORMATION REPORTING
The amount of OID accrued on the Trust Preferred Securities held of record
by United States Persons (other than corporations and other exempt
Securityholders), if any, will be reported to the Service. "Backup" withholding
at a rate of 31% will apply to payments of interest to non-exempt United States
Persons unless the Securityholder furnishes its taxpayer identification number
in the manner prescribed in applicable Treasury Regulations, certifies that such
number is correct, certifies as to no loss of exemption from backup withholding
and meets certain other conditions. Any amounts withheld from a Securityholder
under the backup withholding rules will be allowed as a refund or a credit
against such Securityholder's United States federal income tax liability,
provided the required information is furnished to the Service.
POSSIBLE TAX LAW CHANGES AFFECTING THE TRUST PREFERRED SECURITIES
There can be no assurance that future legislative proposals or final
legislation will not affect the ability of the Company to deduct interest on the
Junior Subordinated Debentures. Congress and the Clinton Administration have
from time to time considered proposals that would deny an issuer a deduction for
United States income tax purposes for the payment of interest on instruments
with characteristics similar to the Junior Subordinated Debentures. Such
proposals have been considered in connection with recent legislation, including
the recently enacted Taxpayer Relief Act of 1997 (the "Relief Act"). Although no
such proposals have been included in the final provisions of recent legislation,
including the Relief Act, there can be no assurance that future legislation will
not adversely affect the tax treatment of the Junior Subordinated Debentures,
potentially on a retroactive basis. Such a change could give rise to a Tax
Event, which may permit First Interstate to cause a redemption of the Trust
Preferred Securities. See "Description of the Trust Preferred
Securities--Redemption" and "Description of Junior Subordinated
Debentures--Redemption."
ERISA CONSIDERATIONS
Employee benefit plans that are subject to the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), or Section 4975 of the Code
("Employee Plans"), generally may purchase Trust Preferred Securities subject to
the investing fiduciary's determination that the investment in Trust
95
<PAGE>
Preferred Securities satisfies ERISA's fiduciary standards and other
requirements applicable to investments by the Employee Plan.
In any case, the Company and/or any of its affiliates may be considered a
"party in interest" (within the meaning of ERISA) or a "disqualified person"
(within the meaning of Section 4975 of the Code) with respect to certain
Employee Plans (generally, those Employee Plans maintained or sponsored by, or
contributed to by, any such persons with respect to which the Company or an
affiliate is a fiduciary or Employee Plans for which the Company or an affiliate
provide services). The acquisition and ownership of Trust Preferred Securities
by an Employee Plan (or by an individual retirement arrangement or other
Employee Plans described in Section 4975(e)(1) of the Code) with respect to
which the Company or any of its affiliates is considered a party in interest or
a disqualified person may constitute or result in a prohibited transaction under
ERISA or Section 4975 of the Code, unless such Trust Preferred Securities are
acquired pursuant to and in accordance with an applicable exemption.
As a result, Employee Plans with respect to which the Company or any of its
affiliates is a party in interest or a disqualified person should not acquire
Trust Preferred Securities unless such Trust Preferred Securities are acquired
pursuant to and in accordance with an applicable exemption. Any other Employee
Plans or other entities whose assets include Employee Plan assets subject to
ERISA or Section 4975 of the Code proposing to acquire Trust Preferred
Securities should consult with their own counsel.
DESCRIPTION OF FIRST INTERSTATE CAPITAL STOCK
The authorized capital stock of First Interstate consists of 20,000,000
shares of Common Stock, of which 8,038,336 shares were outstanding as of October
1, 1997, and 100,000 shares of preferred stock without par value, of which
20,000 shares were outstanding as of October 1, 1997. As of October 1, 1997, the
Common Stock was held of record by approximately 400 stockholders, including the
Company's 401(k) Savings Plan as trustee for shares held on behalf of 592
individual participants in such plan.
COMMON STOCK
Each share of the Common Stock is entitled to one vote in the election of
directors and in all other matters submitted to a vote of stockholders.
Accordingly, holders of a majority of the shares of Common Stock entitled to
vote in any election of directors may elect all of the directors standing for
election if they choose to do so, subject to the rights of holders of the
preferred stock. Voting for directors is non-cumulative.
Subject to the preferential rights of any preferred stock that may at the
time be outstanding, each share of Common Stock has an equal and ratable right
to receive dividends when, if and as declared by the Board of Directors out of
assets legally available therefor. In the event of a liquidation, dissolution or
winding up of First Interstate, the holders of Common Stock will be entitled to
share equally and ratably in the assets available for distribution after
payments to creditors and to the holders of any preferred stock that may at the
time be outstanding. Holders of Common Stock have no conversion rights or
preemptive or other rights to subscribe for any additional shares of Common
Stock or for other securities. All outstanding Common Stock is fully paid and
non-assessable.
DIVIDEND RESTRICTIONS
The holders of Common Stock will be entitled to dividends when, as and if
declared by First Interstate's Board of Directors out of funds legally available
therefor. Under the Company's revolving term loan, the Company is prohibited
from declaring or paying any dividends to common stockholders in excess of 33%
of net income for the immediately preceding year. The Company has also agreed
that the Banks will maintain ratios of tangible primary capital to tangible
primary assets not less than the ratios required by regulators or applicable law
or regulation, and that the Banks will at all times maintain capital at
96
<PAGE>
Adequately Capitalized levels. The loan restrictions limit the funds available
for the payment of dividends from the Banks to First Interstate and from First
Interstate to its stockholders.
Under Montana banking law, FIB Montana may not declare dividends in excess
of its net undivided earnings (as defined) less any required transfers to
surplus and may not declare a dividend larger than the previous two years' net
earnings unless prior notice is given to the Montana Commissioner of Banking and
Financial Institutions. As a FRB member bank, FIB Montana may not, without the
consent of the FRB, declare dividends in a calendar year which, when aggregated
with prior dividends in that calendar year, exceed the calendar year net profits
of FIB Montana together with retained earnings for the prior two calendar years.
Under Wyoming banking law, FIB Wyoming may not declare dividends without meeting
surplus fund requirements and may not, without the approval of the Wyoming
Banking Commissioner, declare dividends in any one calendar year in excess of
its net profits (as defined) in the current year combined with retained net
profits of the preceding two years, less any required transfers to surplus or to
a fund for the retirement of any preferred stock.
In addition, federal regulatory agencies (e.g., the FDIC, OTS and FRB) have
authority to prohibit a bank under their supervision from engaging in practices
which, in the opinion of the particular federal regulatory agency, are unsafe or
unsound or constitute violations of applicable law. For example, depending upon
the financial condition of a bank in question and other factors, the appropriate
federal regulatory agency could determine that the payment of dividends might
under some circumstances constitute an unsafe and unsound practice. Moreover,
each federal regulatory agency has established guidelines for the maintenance of
appropriate levels of capital for a bank under its supervision. Compliance with
the standards set forth in such guidelines could limit the amount of dividends
which First Interstate or any of the Banks could pay. See "Regulation and
Supervision."
Preferred stock is senior to Common Stock with respect to dividends. Before
any dividends on Common Stock can be paid or declared and set apart for payment,
First Interstate must: (i) comply with all conditions and restrictions of any
and all series of preferred stock for which dividends are noncumulative; (ii)
pay, or declare and set aside a sum sufficient for payment, of dividends, past
and current, on any and all series of preferred stock for which dividends are
cumulative; and (iii) satisfy all accrued sinking fund obligations, if any, of
any and all series of preferred stock.
PREFERRED STOCK
The authorized capital stock of First Interstate includes 100,000 shares of
preferred stock, of which 20,000 shares have been designated as noncumulative
perpetual preferred stock. The noncumulative perpetual preferred stock was
issued in October 1996 at a price of $1,000 per share, and is the only series of
preferred stock issued and outstanding. The holders of preferred stock are
entitled to the following preferences, powers and special rights: (i) in the
event of voluntary or involuntary liquidation, dissolution or winding up of the
affairs of First Interstate, holders of preferred stock are entitled to receive
$1,000 per share before any payments to holders of Common Stock; (ii) holders of
preferred stock are entitled to one vote per share, with a required super
majority vote of 66 2/3% of outstanding shares to take action, on the issuance
of any stock having dividend and liquidation rights in preference and priority
to the preferred stock and on the amendment of the Company's Articles of
Incorporation or the Certificate of Designation of the preferred stock having an
adverse affect on the rights of holders of preferred stock; (iii) holders of
preferred stock are entitled to payment of specified dividends when and as
declared by First Interstate's Board of Directors; (iv) holders of preferred
stock are entitled to elect two directors to First Interstate's Board of
Directors if full dividends are not paid for six quarters to holders of the
preferred stock, which right continues until full dividends have been paid for
four consecutive quarters. The preferred stock is not convertible and is not
redeemable prior to seven years from its issuance without consent of the holders
thereof and regulatory approval. In connection with the redemption of the
preferred stock, the Company has agreed to pay a redemption premium of $500,000.
97
<PAGE>
First Interstate's Board of Directors is authorized, without approval of the
holders of Common Stock, to provide for the issuance of additional preferred
stock from time to time in one or more series in such number and with such
designations, preferences, powers and other special rights as may be stated in
the resolution or resolutions providing for such preferred stock. First
Interstate's Board of Directors may cause First Interstate to issue preferred
stock with voting, conversion and other rights that could adversely affect the
holders of the Common Stock or make it more difficult to effect a change of
control of the Company.
In the event of any dissolution, liquidation or winding up of the affairs of
First Interstate, before any distribution or payment may be made to the holders
of Common Stock, the holders of preferred stock would be entitled to be paid in
full with the respective amounts fixed by First Interstate's Board of Directors
in the resolution or resolutions authorizing the issuance of such series,
together with a sum equal to the accrued and unpaid dividends thereon to the
date fixed for such distribution or payment. After payment in full of the amount
which the holders of preferred stock are entitled to receive, the remaining
assets of First Interstate would be distributed ratably to the holders of the
Common Stock. If the assets available are not sufficient to pay in full the
amount so payable to the holders of all outstanding preferred stock, the holders
of all series of such shares would share ratably in any distribution of assets
in proportion to the full amounts to which they would otherwise be respectively
entitled. The consolidation or merger of First Interstate into or with any other
corporation or corporations would not be deemed a liquidation, dissolution, or
winding up of the affairs of First Interstate.
98
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
FIB Capital has agreed to sell to each of the Underwriters named below (the
"Underwriters") for whom D.A. Davidson & Co. is acting as the representative
(the "Representative") and each of the Underwriters has severally agreed to
purchase from FIB Capital, the respective number of Trust Preferred Securities
set forth opposite its name below:
<TABLE>
<CAPTION>
NUMBER OF
TRUST PREFERRED
UNDERWRITERS SECURITIES
- --------------------------------------------------------------------- -----------------------
<S> <C>
D.A. Davidson & Co................................................... 1,160,000
Dain Bosworth Incorporated........................................... 200,000
Piper Jaffray Inc.................................................... 200,000
Mitchell Securities Corporation of Oregon............................ 40,000
----------
Total.......................................................... 1,600,000
----------
----------
</TABLE>
In the Underwriting Agreement, the Underwriters have agreed, subject to the
terms and conditions set forth therein, to purchase all of the 1,600,000 Trust
Preferred Securities offered hereby if any such Trust Preferred Securities are
purchased.
The Representative has advised First Interstate and FIB Capital that the
Underwriters propose to offer the Trust Preferred Securities directly to the
public initially at the public offering price set forth on the cover page of
this Prospectus and to certain dealers at such price less a concession not in
excess of $0.50 per Trust Preferred Security. The Underwriters may allow and
such dealers may reallow a concession not in excess of $0.25 per Trust Preferred
Security to certain other brokers and dealers. After the public offering, the
public offering price, concession and reallowance and other selling terms may be
changed by the Underwriters.
In view of the fact that the proceeds from the sale of the Trust Preferred
Securities will be used to purchase the Junior Subordinated Debentures issued by
First Interstate, the Underwriting Agreement provides that First Interstate will
pay as compensation for the Representative's arranging the investment therein of
such proceeds an amount of $0.9375 per Trust Preferred Security.
First Interstate does not intend to list the Trust Preferred Securities on
any securities exchange or include them for quotation on The Nasdaq Stock
Market. Although the Underwriters have indicated an intention to make a market
in the Trust Preferred Securities, the Underwriters are not obligated to make a
market in the Trust Preferred Securities, and any market making may be
discontinued at any time in the sole discretion of the Underwriters. If the
Trust Preferred Securities are traded after the original issuance, they may
trade at a discount to their issue price.
Each of First Interstate and FIB Capital has agreed to indemnify the
Underwriters and their respective controlling persons against certain
liabilities, including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.
The Representative has advised FIB Capital that the Underwriters do not
intend to confirm sales to any account over which they exercise discretionary
authority in excess of 5.0% of the number of Trust Preferred Securities offered
hereby. In connection with this offering, the Underwriters and selling group
members may engage in transactions that stabilize, maintain or otherwise affect
the price of the Trust Preferred Securities. Specifically, the Underwriters may
overallot the offering, creating a syndicate short position. The Underwriters
may bid for and purchase Trust Preferred Securities. These activities may
stabilize or maintain the market price of the Trust Preferred Securities above
independent market levels. The Underwriters are not required to engage in these
activities and may end these activities at any time.
99
<PAGE>
LEGAL MATTERS
Certain matters of Delaware law relating to the validity of the Trust
Preferred Securities, the enforceability of the Trust Agreement and the creation
of FIB Capital will be passed upon by Richards, Layton & Finger, P.A.,
Wilmington, Delaware, special counsel to First Interstate and FIB Capital. The
validity of the Guarantee and the Junior Subordinated Debentures will be passed
upon for the Company by Holland & Hart LLP, Salt Lake City, Utah, counsel to the
Company. Certain legal matters in connection with this offering will be passed
upon for the Underwriters by Dorsey & Whitney LLP, Minneapolis, Minnesota.
Holland & Hart LLP and Dorsey & Whitney LLP will rely on the opinions of
Richards, Layton & Finger, P.A., as to matters of Delaware law. Certain matters
relating to United States federal income tax considerations will be passed upon
for the Company by Holland & Hart LLP.
EXPERTS
The consolidated financial statements of the Company as of December 31,
1996, and 1995, and for each of the years in the three-year period ended
December 31, 1996, have been included in this Prospectus and in the Registration
Statement in reliance on the report of KPMG Peat Marwick LLP, independent
certified public accountants, appearing elsewhere herein, given on the authority
of said firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
First Interstate and FIB Capital have jointly filed with the Securities and
Exchange Commission (the "Commission") a Registration Statement on Form S-1
(together with all amendments and exhibits thereto, the "Registration
Statement") under the Securities Act, with respect to the offering of the
securities offered hereby. This Prospectus does not contain all of the
information set forth in the Registration Statement, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company, FIB Capital and the securities
offered hereby, reference is made to the Registration Statement and the exhibits
and schedules filed as a part thereof or incorporated by reference therein,
which may be inspected at the public reference facilities of the Commission, at
the addresses set forth below. Statements made in this Prospectus concerning the
contents of any documents referred to herein are not necessarily complete, and
in each instance are qualified in all respects by reference to the copy of such
document filed as an exhibit to the Registration Statement.
First Interstate is subject to certain informational requirements of the
Exchange Act, and in accordance therewith files certain reports and other
information with the Commission. Reports and other information filed by First
Interstate can be inspected and copies of such material can be obtained at
prescribed rates from the Public Reference Section of the Commission, 450 Fifth
Street, N.W., Room 1024, Judiciary Plaza, Washington, D.C. 20549, and at the
following Regional Offices of the Commission: Chicago Regional Office, Citicorp
Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60661; and New
York Regional Office, 7 World Trade Center, Suite 1300, New York, New York
10048. The Commission also maintains a Web site (http://www.sec.gov) at which
reports and other information regarding First Interstate may be accessed.
No separate financial statements of FIB Capital have been included herein.
First Interstate and FIB Capital do not consider such financial statements
material to holders of the Trust Preferred Securities because FIB Capital is a
newly formed special purpose entity, has no operating history or independent
operations and is not engaged in and does not propose to engage in any activity
other than holding as trust assets the Junior Subordinated Debentures and
issuing the Trust Securities. See "Prospectus Summary-- FIB Capital,"
"Description of the Trust Preferred Securities," "Description of Junior
Subordinated Debentures" and "Description of Guarantee."
The Company intends to furnish to the holders of the Trust Preferred
Securities annual reports containing financial statements audited by an
independent auditing firm and to make available quarterly reports for the first
three quarters of each fiscal year containing unaudited financial information.
100
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENT
<TABLE>
<CAPTION>
PAGE
-----
<S> <C>
Independent Auditors' Report............................................................................... F-1
Consolidated Balance Sheets as of June 30, 1997 (unaudited) and December 31, 1996
and 1995................................................................................................. F-2
Consolidated Statements of Income for the six months ended June 30, 1997 and 1996 (unaudited) and for the
years ended December 31, 1996, 1995 and 1994............................................................. F-3
Consolidated Statements of Stockholders' Equity for the six months ended June 30, 1997 (unaudited) and for
the years ended December 31, 1996, 1995 and 1994......................................................... F-4
Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996 (unaudited) and for
the years ended December 31, 1996, 1995 and 1994......................................................... F-5
Notes to Consolidated Financial Statements................................................................. F-7
</TABLE>
101
<PAGE>
INDEPENDENT AUDITORS' REPORT
[LOGO]
The Board of Directors and Stockholders
First Interstate BancSystem, Inc.:
We have audited the accompanying consolidated balance sheets of First
Interstate BancSystem, Inc. and subsidiaries as of December 31, 1996 and 1995,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of First
Interstate BancSystem, Inc. and subsidiaries at December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996 in conformity with generally
accepted accounting principles.
As discussed in note 1, the Company changed its method of accounting for
investment securities to adopt the provisions of the Financial Accounting
Standards Board's Statement on Financial Accounting Standards No. 115,
ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES, effective
January 1, 1994.
KPMG Peat Marwick LLP
Billings, Montana
March 21, 1997, except as to note 20,
which is as of October 7, 1997
F-1
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------
1996 1995
JUNE 30, ------------ ------------
1997
------------
(UNAUDITED)
<S> <C> <C> <C>
ASSETS
Cash and due from banks................................... $ 130,362 160,962 98,622
Federal funds sold........................................ 19,275 4,945 44,420
Interest-bearing deposits in banks........................ 37 6,545 23,040
Investment securities:
Available-for-sale...................................... 83,479 124,502 65,790
Held-to-maturity........................................ 313,452 279,069 192,947
------------ ------------ ------------
396,931 403,571 258,737
------------ ------------ ------------
Loans..................................................... 1,475,852 1,375,479 870,378
Less allowance for loan losses............................ 28,757 27,797 15,171
------------ ------------ ------------
Net loans................................................. 1,447,095 1,347,682 855,207
------------ ------------ ------------
Premises and equipment, net............................... 58,976 58,183 32,540
Accrued interest receivable............................... 21,066 19,573 14,344
Goodwill and other intangibles, net of accumulated
amortization of $7,284 at June 30, 1997 (unaudited) and
$5,971 in 1996 and $4,594 in 1995....................... 34,160 39,010 10,221
Other real estate owned, net.............................. 1,098 1,546 1,349
Deferred tax asset........................................ 6,629 4,921 4,432
Other assets.............................................. 15,722 16,899 8,303
------------ ------------ ------------
$ 2,131,351 2,063,837 1,351,215
------------ ------------ ------------
------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits:
Noninterest bearing..................................... $ 353,189 385,371 230,136
Interest bearing........................................ 1,319,846 1,294,053 868,933
------------ ------------ ------------
Total deposits............................................ 1,673,035 1,679,424 1,099,069
------------ ------------ ------------
Federal funds purchased................................... 61,900 13,450 3,125
Securities sold under repurchase agreements............... 129,538 129,137 104,898
Accounts payable and accrued expenses..................... 19,497 18,027 13,396
Other borrowed funds...................................... 37,272 13,071 5,494
Long-term debt............................................ 56,184 64,667 15,867
------------ ------------ ------------
Total liabilities......................................... 1,977,426 1,917,776 1,241,849
------------ ------------ ------------
Stockholders' equity:
Non-voting noncumulative 8.53% preferred stock without
par value; authorized 100,000 shares; issued and
outstanding 20,000 shares in 1996 and 1997............ 20,000 20,000 --
Common stock without par value; authorized 20,000,000
shares; issued and outstanding 7,888,644 shares in
1997, 7,913,072 shares in 1996 and 7,791,040 shares in
1995.................................................. 8,350 8,941 6,692
Retained earnings....................................... 125,205 116,613 102,281
Unrealized holding gain on investment securities
available-for-sale, net............................... 370 507 393
------------ ------------ ------------
Total stockholders' equity................................ 153,925 146,061 109,366
------------ ------------ ------------
$ 2,131,351 2,063,837 1,351,215
------------ ------------ ------------
------------ ------------ ------------
Book value per common share............................... $ 16.98 15.93 14.04
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-2
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
SIX MONTHS ENDED JUNE --------- --------- ---------
30,
------------------------
1996
1997 -----------
----------- (UNAUDITED)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Interest income:
Interest and fees on loans.......................... $ 68,233 44,600 99,882 83,577 65,778
Interest and dividends on investment securities:
Taxable........................................... 10,762 6,931 15,343 12,147 12,790
Exempt from Federal taxes......................... 527 498 982 783 331
Interest on deposits with banks..................... 97 225 376 368 35
Interest on Federal funds sold...................... 711 600 1,342 2,095 1,296
----------- ----------- --------- --------- ---------
Total interest income........................... 80,330 52,854 117,925 98,970 80,230
----------- ----------- --------- --------- ---------
Interest expense:
Interest on deposits................................ 27,470 19,456 42,122 35,898 25,246
Interest on Federal funds purchased................. 1,085 259 1,043 1,008 690
Interest on securities sold under repurchase
agreements........................................ 2,811 2,106 4,508 3,560 1,814
Interest on other borrowed funds.................... 519 141 318 298 187
Interest on long-term debt.......................... 2,488 589 2,028 1,182 514
----------- ----------- --------- --------- ---------
Total interest expense.......................... 34,373 22,551 50,019 41,946 28,451
----------- ----------- --------- --------- ---------
Net interest income............................. 45,957 30,303 67,906 57,024 51,779
Provision for loan losses............................. 2,281 1,152 3,844 1,629 1,344
----------- ----------- --------- --------- ---------
Net interest income after provision for loan
losses........................................ 43,676 29,151 64,062 55,395 50,435
Other operating income:
Income from fiduciary activities.................... 2,022 1,523 3,161 2,619 2,542
Service charges on deposit accounts................. 4,910 3,518 7,752 6,532 5,883
Data processing..................................... 3,667 3,822 7,324 6,196 4,746
Other service charges, commissions, and fees........ 1,939 1,293 2,857 2,535 2,268
Investment securities gains (losses), net........... 73 2 18 (6) 69
Other income........................................ 874 582 2,815 888 879
----------- ----------- --------- --------- ---------
Total other operating income.................... 13,485 10,740 23,927 18,764 16,387
----------- ----------- --------- --------- ---------
Other operating expenses:
Salaries and wages.................................. 14,202 9,897 21,789 18,917 16,565
Employee benefits................................... 3,832 2,663 5,742 4,777 4,614
Occupancy, net...................................... 3,081 2,040 4,505 3,916 3,546
Furniture and equipment............................. 3,754 2,751 6,249 5,244 4,558
Other real estate expense (income), net............. (115) (159) (214) (586) (457)
FDIC insurance...................................... 101 1 5 1,127 2,008
Other expenses...................................... 11,132 6,014 15,319 12,583 10,393
----------- ----------- --------- --------- ---------
Total other operating expenses.................. 35,987 23,207 53,395 45,978 41,227
----------- ----------- --------- --------- ---------
Income before income taxes............................ 21,174 16,684 34,594 28,181 25,595
Income tax expense.................................... 8,080 6,414 13,351 10,844 9,861
----------- ----------- --------- --------- ---------
Net income...................................... $ 13,094 10,270 21,243 17,337 15,734
----------- ----------- --------- --------- ---------
----------- ----------- --------- --------- ---------
Net income applicable to common stock................. $ 12,247 10,270 20,818 17,337 15,734
----------- ----------- --------- --------- ---------
----------- ----------- --------- --------- ---------
Net income per common share........................... $ 1.54 1.31 2.64 2.21 2.00
----------- ----------- --------- --------- ---------
----------- ----------- --------- --------- ---------
Weighted average common shares outstanding............ 7,936,708 7,802,892 7,881,024 7,843,644 7,850,188
----------- ----------- --------- --------- ---------
----------- ----------- --------- --------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
<TABLE>
<CAPTION>
UNREALIZED TOTAL
PREFERRED COMMON RETAINED HOLDING GAINS STOCKHOLDERS'
STOCK STOCK EARNINGS (LOSSES), NET EQUITY
----------- ----------- ----------- --------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1993........................ $ -- 8,119 76,044 -- 84,163
Effect of change in accounting for investment
securities January 1, 1994........................ -- -- -- 122 122
Common stock transactions:
69,932 shares retired............................. -- (950) -- -- (950)
28,056 shares issued.............................. -- 362 -- -- 362
Cash dividends declared ($0.40 per common share).... -- -- (3,101) -- (3,101)
Increase in unrealized loss on available-for-sale
investment securities, net........................ -- -- -- (1,058) (1,058)
Net income.......................................... -- -- 15,734 -- 15,734
----------- ----------- ----------- ------ -------------
Balance at December 31, 1994........................ -- 7,531 88,677 (936) 95,272
Common stock transactions:
72,524 shares retired............................. -- (1,197) -- -- (1,197)
26,908 shares issued.............................. -- 358 -- -- 358
Cash dividends declared ($0.48 per common share).... -- -- (3,733) -- (3,733)
Increase in unrealized gains on available-for-sale
investment securities, net........................ -- -- -- 1,329 1,329
Net income.......................................... -- -- 17,337 -- 17,337
----------- ----------- ----------- ------ -------------
Balance at December 31, 1995........................ -- 6,692 102,281 393 109,366
Preferred stock issuance:
20,000 shares issued.............................. 20,000 -- -- -- 20,000
Preferred stock issuance costs...................... -- -- (458) -- (458)
Common stock transactions:
65,808 shares retired............................. -- (1,229) -- -- (1,229)
187,840 shares issued............................. -- 3,478 -- -- 3,478
Cash dividends declared:
Common ($0.77 per share).......................... -- -- (6,028) -- (6,028)
Preferred (8.53%)................................. -- -- (425) -- (425)
Increase in unrealized gains on available-for-sale
investment securities, net........................ -- -- -- 114 114
Net income.......................................... -- -- 21,243 -- 21,243
----------- ----------- ----------- ------ -------------
Balance at December 31, 1996........................ 20,000 8,941 116,613 507 146,061
Common stock transactions, unaudited:
35,216 shares retired............................. -- (730) -- -- (730)
10,788 shares issued.............................. -- 139 -- -- 139
Cash dividends declared, unaudited:
Common ($0.46 per share).......................... -- -- (3,656) -- (3,656)
Preferred (8.53%)................................. -- -- (846) -- (846)
Increase in unrealized gains on available-for-sale
investment securities, net, unaudited............. -- -- -- (137) (137)
Net income, unaudited............................... -- -- 13,094 -- 13,094
----------- ----------- ----------- ------ -------------
Balance at June 30, 1997, unaudited................. $ 20,000 8,350 125,205 370 153,925
----------- ----------- ----------- ------ -------------
----------- ----------- ----------- ------ -------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED JUNE 30, --------------------------------
------------------------ 1996 1995 1994
1996 ---------- --------- ---------
-----------
1997 (UNAUDITED)
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 13,094 10,270 21,243 17,337 15,734
Adjustments to reconcile net income to net cash
provided by operating activities:
Provisions for loan and other real estate
losses........................................ 2,277 1,152 3,823 1,601 1,354
Depreciation and amortization................... 4,153 2,239 5,654 4,272 3,612
Net premium amortization on investment
securities.................................... 289 614 591 1,111 1,688
Loss (gain) on sale of investments, net......... (73) (2) (18) 6 (69)
Gain on sale of other real estate owned......... (190) (218) (335) (527) (578)
(Gain) loss on sales of premises and
equipment..................................... (14) 1 (2) -- 13
Provision for deferred income taxes............. (1,655) (1,476) (528) 129 232
Increase in interest receivable................. (1,493) (1,344) (507) (1,828) (1,440)
Decrease (increase) in other assets............. 1,177 250 (1,767) 2,069 (4,621)
Increase (decrease) in accounts payable and
accrued expenses.............................. 615 (501) 394 3,553 7
----------- ----------- ---------- --------- ---------
Net cash provided by operating activities..... 18,180 10,985 28,548 27,723 15,932
----------- ----------- ---------- --------- ---------
Cash flows from investing activities:
Net change in interest-bearing deposits........... 6,508 22,007 16,495 (22,012) (1,028)
Purchases of investment securities:
Held-to-maturity................................ (333,219) (40,994) (200,361) (88,857) (73,771)
Available-for-sale.............................. (237) (11,509) (63,477) (12,254) (13,329)
Proceeds from maturities and paydowns of
investment securities:
Held-to-maturity................................ 298,953 53,773 150,313 116,267 70,497
Available-for-sale.............................. 9,579 8,754 62,460 12,901 11,437
Sales of investment securities:
Available-for-sale.............................. 31,158 -- 5,523 -- 117
Extensions of credit to customers, net of
repayments...................................... (99,191) (71,642) (98,142) (70,149) (86,118)
Recoveries on loans charged-off................... 1,652 649 1,987 1,016 889
Proceeds from sale of other real estate owned..... 879 482 1,121 1,236 1,942
Acquisitions of subsidiaries, net of cash and cash
equivalents acquired............................ -- -- 24,840 (10,465) --
Capital distribution from (contribution to)
building joint venture.......................... -- -- 150 (2,100) --
Capital expenditures, net......................... (3,619) (3,013) (6,324) (4,675) (3,391)
----------- ----------- ---------- --------- ---------
Net cash used in investing activities........... (87,537) (41,493) (105,415) (79,092) (92,755)
----------- ----------- ---------- --------- ---------
</TABLE>
F-5
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED DECEMBER 31,
ENDED JUNE 30, --------------------------------
------------------------ 1996 1995 1994
1996 ---------- --------- ---------
-----------
(UNAUDITED)
1997
-----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from financing activities:
Net increase in deposits.......................... $ (6,389) (16,582) 56,674 76,354 3,064
Net increase (decrease) in federal funds and
repurchase agreements........................... 48,851 11,984 (15,938) 29,148 23,860
Advances (repayments) of other borrowed funds,
net............................................. 24,201 3,814 (871) (1,594) --
Borrowings of long-term debt...................... 1,750 424 66,939 13,484 122
Repayment of long-term debt....................... (10,233) (6,057) (22,410) (3,066) (1,526)
Proceeds from issuance of common stock............ 139 277 3,478 358 362
Proceeds from issuance of preferred stock, net of
issuance costs.................................. -- -- 19,542 -- --
Payments to retire common stock................... (730) (931) (1,229) (1,197) (950)
Dividends paid on common stock.................... (3,656) (2,957) (6,028) (3,733) (3,101)
Dividends paid on preferred stock................. (846) -- (425) -- --
----------- ----------- ---------- --------- ---------
Net cash provided by (used in) financing
activities.................................. 53,087 (10,028) 99,732 109,754 21,831
----------- ----------- ---------- --------- ---------
Net (decrease) increase in cash and cash
equivalents....................................... (16,270) (40,536) 22,865 58,385 (54,,992)
Cash and cash equivalents at beginning
of year........................................... 165,907 143,042 143,042 84,657 139,649
----------- ----------- ---------- --------- ---------
Cash and cash equivalents at end of period.......... $ 149,637 102,506 165,907 143,042 84,657
----------- ----------- ---------- --------- ---------
----------- ----------- ---------- --------- ---------
</TABLE>
Noncash Investing and Financing Activities--The Company transferred loans of
$668, $227 and $106 to other real estate owned in 1996, 1995 and 1994,
respectively. The Company transferred loans of $237 and $197 to other real
estate owned during the six months ended June 30, 1997 and 1996, respectively.
On January 1, 1994, the Company reclassified investment securities of $46,237 as
available-for-sale.
See accompanying notes to consolidated financial statements.
F-6
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company provides a full range of banking services to individual and
corporate customers through its bank and non-bank subsidiaries and their branch
offices throughout the states of Montana and Wyoming. The Company is subject to
competition from other financial institutions and financial service providers.
The Company is subject to the regulations of certain Federal and state agencies
and undergoes periodic examinations by those regulatory authorities. The
following is a summary of significant accounting policies utilized by the
Company:
PRINCIPLES OF CONSOLIDATION. The consolidated financial statements include
the accounts of First Interstate BancSystem, Inc. (Parent Company) and its
operating subsidiaries: First Interstate Bank in Montana, formerly known as
First Interstate Bank of Commerce in Montana (FIB Montana), First Interstate
Bank in Wyoming, formerly known as First Interstate Bank of Commerce in Wyoming
(FIB Wyoming), First Interstate Bank of Montana, N.A., First Interstate Bank of
Wyoming, N.A., Mountain Bank of Whitefish, doing business as First Interstate
Bank, First Interstate Bank, fsb and Commerce Financial, Inc. All material
intercompany transactions have been eliminated in consolidation.
BASIS OF PRESENTATION. The financial statements have been prepared in
conformity with generally accepted accounting principles. In preparing the
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
balance sheet and revenues and expenses for the period. Actual results could
differ significantly from those estimates.
Material estimates that are particularly susceptible to significant change
in the near-term relate to the determination of the allowance for loan losses
and the valuation of real estate acquired in connection with foreclosures or in
satisfaction of loans. In connection with the determination of the allowances
for loan losses and real estate owned, management obtains independent appraisals
for significant properties. Management believes that the allowances for losses
on loans and real estate owned are adequate. In addition, various regulatory
agencies, as an integral part of their examination process, periodically review
the allowances for losses on loans and real estate owned. While management uses
available information to recognize losses on loans and real estate owned, future
additions to the allowances may be necessary based on changes in economic
conditions which may affect the borrowers' ability to pay or regulatory
requirements.
In the opinion of management, the unaudited interim consolidated statements
contain all adjustments (all of which are of normal recurring nature) necessary
to present fairly the consolidated financial position at June 30, 1997 and the
results of consolidated operations and cash flows for each of the six month
periods ending June 30, 1997 and 1996, respectively.
In addition to purchasing and selling Federal funds for their own account,
the Company purchases and sells Federal funds as an agent. These and other
assets held in an agency or fiduciary capacity are not assets of the Company
and, accordingly, are not included in the accompanying consolidated financial
statements.
CASH AND CASH EQUIVALENTS. For purposes of reporting cash flows, cash and
cash equivalents include cash on hand, amounts due from banks and federal funds
sold for one day periods.
At December 31, 1996 the Company was required to have aggregate reserves in
the form of cash on hand and deposits with the Federal Reserve Bank of
approximately $16,060. Also, an additional $23,800
F-7
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
compensating balance was maintained with the Federal Reserve Bank to mitigate
the payment of service charges for check clearing services.
INVESTMENT SECURITIES. In May 1993, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards ("SFAS") No. 115,
"Accounting for Certain Investments in Debt and Equity Securities". The Company
adopted the provisions of the statement as of January 1, 1994. There were no
cumulative adjustments to income as a result of adopting the statement, however,
the beginning balance of stockholders' equity was increased by $122 (which is
net of $66 in deferred income taxes) to reflect net unrealized gains on
securities classified as available-for-sale previously carried at the lower of
amortized cost or market. The Company's accounting policy for investment
securities is as follows:
TRADING ACCOUNT ASSETS
Trading account assets consist of debt and equity securities that are
bought and held principally for the purpose of selling them in the near term
and are reported at fair value, with unrealized gains and losses included in
earnings. The Company carried no trading account assets during 1996 and
1995.
INVESTMENT SECURITIES HELD-TO-MATURITY AND INVESTMENT SECURITIES
AVAILABLE-FOR-SALE
Management determines the appropriate classification of debt securities
at the time of purchase. Debt securities are classified as held-to-maturity
when the Company has the positive intent and ability to hold the securities
to maturity. Held-to-maturity securities are stated at amortized cost.
Debt securities not classified as held-to-maturity or trading account
assets are classified as available-for-sale. In addition, all equity
securities not classified as trading are classified as available-for-sale.
Available-for-sale securities are stated at fair value, with the unrealized
gains and losses, net of deferred taxes, reported as a separate component of
stockholders' equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums over the estimated
average life of the security, accretion of discounts to maturity, or in the case
of mortgage-backed securities, over the estimated life of the security. Such
amortization and accretion is included in interest income with interest and
dividends. Realized gains and losses, and declines in value judged to be
other-than-temporary, are included in investment securities gains (losses). The
cost of securities sold is based on the specific identification method.
LOANS. Loans are reported at the principal amount outstanding. Interest is
calculated by using the simple interest method on the daily balance of the
principal amount outstanding.
Loans on which the accrual of interest has been discontinued are designated
as nonaccrual loans. Accrual of interest on loans is discontinued either when
reasonable doubt exists as to the full, timely collection of interest or
principal or when a loan becomes contractually past due by ninety days or more
with respect to interest or principal unless such past due loan is well secured
and in the process of collection. When a loan is placed on nonaccrual status,
interest previously accrued but not collected is reversed against current period
interest income. Interest accruals are resumed on such loans only when they are
brought fully current with respect to interest and principal and when, in the
judgement of management, the loans are estimated to be fully collectible as to
both principal and interest.
F-8
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Renegotiated loans are those loans on which concessions in terms have been
granted because of a borrower's financial difficulty.
Significant loan origination fees, net of related costs, are recognized over
the lives of the related loans as an adjustment of yield.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses which is charged to expense. Loans are
charged against the allowance for loan losses when management believes that the
collectibility of the principal is unlikely or, with respect to consumer
installment loans, according to an established delinquency schedule. The
allowance balance is an amount that management believes will be adequate to
absorb losses inherent in existing loans, leases and commitments to extend
credit, based on evaluations of the collectibility and prior loss experience of
loans, leases and commitments to extend credit. The evaluations take into
consideration such factors as changes in the nature and volume of the portfolio,
overall portfolio quality, loan concentrations, specific problem loans, leases
and commitments, and current and anticipated economic conditions that may affect
the borrowers' ability to pay.
The Company may also establish a reserve for losses on specific loans which
are deemed to be impaired. Groups of small balance homogeneous basis loans
(generally consumer loans) are evaluated for impairment collectively. A loan is
considered impaired when, based upon current information and events, it is
probable that the Company will be unable to collect, on a timely basis, all
principal and interest according to the contractual terms of the loan's original
agreement. When a specific loan is determined to be impaired, the allowance for
loan losses is increased through a charge to expense for the amount of the
impairment. The amount of the impairment is measured using cash flows discounted
at the loan's effective interest rate, except when it is determined that the
sole source of repayment for the loan is the operation or liquidation of the
underlying collateral. In such cases, the current value of the collateral,
reduced by anticipated selling costs, will be used to measure impairment instead
of discounted cash flows. The Company's impaired loans are those non-consumer
loans which are non-accrual or a troubled debt restructuring. Interest income is
recognized on impaired loans only to the extent that cash payments are received.
The Company's existing policies for evaluating the adequacy of the allowance for
loan losses and policies for discontinuing the accrual of interest on loans are
used to establish the basis for determining whether a loan is impaired.
GOODWILL AND OTHER INTANGIBLES. The excess of purchase price over the fair
value of net assets from acquisitions ("Goodwill") is being amortized using the
straight-line method over periods of primarily 15 to 25 years. The Company
assesses the recoverability of Goodwill by determining whether the unamortized
balance related to an acquisition can be recovered through undiscounted future
cash flows over the remaining amortization period.
Core deposit intangibles represent the intangible value of depositor
relationships resulting from deposit liabilities assumed in acquisitions and are
amortized using an accelerated method based on an estimated runoff of the
related deposits, not exceeding 10 years. Purchased mortgage servicing rights
("MSR") represent the value of purchased rights to service mortgage loans. The
MSR are amortized in proportion to and over the period of estimated net
servicing income not expected to exceed 12 years. MSR are evaluated for
impairment based on the MSR current fair value.
F-9
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PREMISES AND EQUIPMENT. Buildings, furniture and equipment are stated at
cost less accumulated depreciation. Depreciation is provided over estimated
useful lives of 5 to 50 years for buildings and improvements and 3 to 15 years
for furniture and equipment using straight-line methods. Leasehold improvements
are amortized using straight-line methods over the shorter of the estimated
useful lives of the improvements or the terms of the related leases.
Consolidated depreciation expense was $4,182 in 1996, $3,541 in 1995 and $3,318
in 1994.
LONG-LIVED ASSETS. The Company adopted the provisions of SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets for Long-Lived Assets to Be
Disposed Of," on January 1, 1996. The statement requires long-lived assets and
certain identifiable intangibles (e.g. premises, Goodwill, core deposit
intangibles) be reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
An asset is deemed impaired if the sum of the expected future cash flows is less
than the carrying amount of the asset. The amount of the impairment loss is
based on the assets' fair value, which may be estimated by discounting the
expected future cash flows. The adoption of SFAS No. 121 did not have a material
impact on the Company's consolidated financial position or consolidated results
of operations.
OTHER REAL ESTATE OWNED. Real estate acquired in satisfaction of loans is
carried at the lower of the recorded investment in the property at the date of
foreclosure or its current fair value less selling cost ("Net Realizable
Value"). The value of the underlying loan is written down to the fair market
value of the real estate acquired by a charge to the allowance for loan losses,
if necessary, at the date of foreclosure. A provision to the real estate owned
valuation allowance is charged against other real estate expense for any current
or subsequent write-downs to Net Realizable Value. Operating expenses of such
properties, net of related income, and gains on sales are included in other real
estate expenses.
SELF-INSURANCE. The Company is self-insured with respect to employee
medical claims up to specified limits per claim. The Company has an accrual of
approximately $560 for estimated unsettled and incurred but not reported claims.
INCOME FROM FIDUCIARY ACTIVITIES. Consistent with industry practice, income
for trust services is recognized on the basis of cash received. However, use of
this method in lieu of accrual basis accounting does not materially affect
reported earnings.
INCOME TAXES. The Parent Company and its subsidiaries have elected to be
included in a consolidated Federal income tax return. For state income tax
purposes, the combined taxable income of the Parent Company and its subsidiaries
is apportioned between the states in which operations take place. Federal and
state income taxes attributable to the subsidiaries, computed on a separate
return basis, are paid to or received from the Parent Company.
Deferred tax assets and liabilities are reflected at currently enacted
income tax rates applicable to the period in which the deferred tax assets or
liabilities are expected to be realized or settled. As changes in tax laws or
rates are enacted, deferred tax assets and liabilities are adjusted through the
provision for income taxes.
PER SHARE DATA. Earnings per common share is calculated by dividing net
income less preferred stock dividends by the weighted average number of common
shares and common share equivalents outstanding
F-10
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
during the period. Book value per common share is calculated by dividing total
stockholders' equity less preferred stock by the number of common shares
outstanding at the end of the year.
STOCK-BASED COMPENSATION. The Company adopted SFAS No. 123, "Accounting for
Stock-Based Compensation," as of January 1, 1996. SFAS No. 123 encourages all
entities to adopt a new method of accounting to measure compensation cost of all
employee stock compensation plans based on the estimated fair value of the award
at the date it is granted. Companies are, however, allowed to continue to
measure compensation cost for those stock-based employee compensation plans
using the intrinsic value-based method of accounting, which generally results in
compensation expense only when the exercise price is less than the fair value of
the underlying stock at the date of grant. Companies that elect to remain with
the intrinsic value method are required to disclose in a footnote to the
financial statements pro forma net income and earnings per share, as if the fair
value method of SFAS No. 123 had been adopted. The Company has elected to
continue accounting for stock-based employee compensation plans in accordance
with Accounting Principles Board No. 25 (see note 12).
RECLASSIFICATIONS. Certain reclassifications have been made to the 1995 and
1994 amounts to conform to the 1996 presentation.
(2) REGULATORY MATTERS
The Federal Reserve Board (FRB) and the Federal Deposit Insurance
Corporation (FDIC) have issued risk-based capital guidelines to more accurately
consider the credit risk inherent in the assets and off-balance-sheet activities
of a bank or bank holding company and their assessment of capital adequacy.
Under the guidelines, total capital has been redefined as core capital and
supplementary capital. Core capital consists primarily of stockholders' equity,
while supplementary capital consists primarily of the allowance for loan losses
(not to exceed 1.25% of risk weighted assets). Under the guidelines, all
intangible assets are to be excluded from the components of core capital. The
definition of assets has also been modified to include items on and off the
balance sheet, with each item being assigned a predefined credit "risk-weight".
At December 31, 1996, the Company's consolidated risk-based capital (core
plus supplementary) and core capital ratios, calculated in accordance with the
guidelines, were 10.0% and 7.4%, respectively.
In addition to the risk-based guidelines discussed above, the FRB and FDIC
also established a leverage ratio defined as core capital as a percentage of
average tangible assets. The Company's consolidated leverage ratio at December
31, 1996 was 5.3%.
The Federal Deposit Insurance Corporation Improvement Act (FDICIA), which
was enacted on December 19, 1992, substantially revises the bank regulatory and
funding provisions of the Federal Deposit Insurance Act and makes revisions to
several other federal banking statutes.
Among other things, FDICIA requires the federal banking agencies to
implement differing levels of oversight depending on the institution's capital
category, as defined in the regulations. A depository institution's capital
category will depend upon where its capital ratios are in relation to various
relevant capital measures, which include the risk-based capital and leverage
ratios. The capital categories represent minimum standards that will generally
be applied to all institutions. However, the regulatory agencies may impose
higher minimum standards on individual institutions or may downgrade an
institution at the
F-11
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(2) REGULATORY MATTERS (CONTINUED)
applicable agency's discretion. FDICIA generally restricts a depository
institution from making any capital distribution (including payment of a
dividend) or paying any management fee to its holding company if the depository
institution would thereafter be undercapitalized (less than 8% total risk-based
capital or 4% core capital and 3% leverage). At December 31, 1996, the Company's
and bank subsidiaries' capital ratios meet or exceed the highest capital
category, which requires total risk-based capital of at least 10%, core capital
of at least 6% and a leverage ratio of at least 5%.
(3) INVESTMENT SECURITIES
The amortized cost and approximate market values of investment securities
are summarized as follows:
AVAILABLE-FOR-SALE
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1996 COST GAINS LOSSES VALUE
- ----------------------------------------------------------------- ---------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities......................................... $ 45,272 153 -- 45,425
Obligations of U.S. Government agencies.......................... 54,919 340 (114) 55,145
States, county and municipal securities.......................... 7,717 295 (2) 8,010
Corporate securities............................................. 2,484 7 (5) 2,486
Other mortgage-backed securities................................. 3,703 16 (10) 3,709
Other securities................................................. 9,607 120 -- 9,727
---------- --- --- -----------
Total........................................................ $ 123,702 931 (131) 124,502
---------- --- --- -----------
---------- --- --- -----------
</TABLE>
HELD-TO-MATURITY
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1996 COST GAINS LOSSES VALUE
- ----------------------------------------------------------------- ---------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities......................................... $ 169,196 445 (731) 168,910
Obligations of U.S. Government agencies.......................... 89,600 158 (179) 89,579
States, county and municipal securities.......................... 11,793 152 (12) 11,933
Corporate securities............................................. 8,480 1 (27) 8,454
---------- --- --- -----------
Total........................................................ $ 279,069 756 (949) 278,876
---------- --- --- -----------
---------- --- --- -----------
</TABLE>
Gross gains of $18 and no gross losses were realized on the sale of
available-for-sale securities in 1996.
F-12
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(3) INVESTMENT SECURITIES (CONTINUED)
AVAILABLE-FOR-SALE
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1995 COST GAINS LOSSES VALUE
- ------------------------------------------------------------------ ----------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
Obligations of U.S. Government agencies........................... $ 48,288 576 (163) 48,701
States, county and municipal securities........................... 7,392 382 (146) 7,628
Corporate securities.............................................. 808 -- (3) 805
Other mortgage-backed securities.................................. 3,206 12 (10) 3,208
Other securities.................................................. 5,448 14 (14) 5,448
----------- --- --- -----------
Total......................................................... $ 65,142 984 (336) 65,790
----------- --- --- -----------
----------- --- --- -----------
</TABLE>
HELD-TO-MATURITY
<TABLE>
<CAPTION>
GROSS GROSS ESTIMATED
AMORTIZED UNREALIZED UNREALIZED MARKET
DECEMBER 31, 1995 COST GAINS LOSSES VALUE
- ----------------------------------------------------------------- ---------- ------------- ------------- -----------
<S> <C> <C> <C> <C>
U.S. Treasury securities......................................... $ 121,086 248 (493) 120,841
Obligations of U.S. Government agencies.......................... 51,599 314 (137) 51,776
States, county and municipal securities.......................... 11,102 206 (34) 11,274
Corporate securities............................................. 9,160 7 (21) 9,146
---------- --- --- -----------
Total........................................................ $ 192,947 775 (685) 193,037
---------- --- --- -----------
---------- --- --- -----------
</TABLE>
Gross gains of $6 and gross losses of $12 were realized on the sale of
available-for-sale securities in 1995. Gross gains of $70 and gross losses of $1
were realized on the sale of securities in 1994.
Maturities of investment securities by contractual maturity at December 31,
1996 are shown below. Maturities of securities do not reflect rate repricing
opportunities present in many adjustable rate mortgage-backed and corporate
securities, nor do they reflect expected shorter maturities based upon early
prepayments of principal.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
------------------------ -------------------------
AMORTIZED ESTIMATED AMORTIZED ESTIMATED
DECEMBER 31, 1996 COST MARKET VALUE COST MARKET VALUE
- ------------------------------------------------------------- ---------- ------------ ----------- ------------
<S> <C> <C> <C> <C>
Within one year.............................................. $ 3,720 3,719 109,646 109,538
After one but within five years.............................. 68,523 68,809 159,029 158,868
After five years but within ten years........................ 11,277 11,557 5,150 5,239
After ten years.............................................. 26,301 26,410 619 620
---------- ------------ ----------- ------------
Total...................................................... 109,821 110,495 274,444 274,265
---------- ------------ ----------- ------------
Collateralized mortgage obligations and other................ 13,881 14,007 4,625 4,611
---------- ------------ ----------- ------------
Total...................................................... $ 123,702 124,502 279,069 278,876
---------- ------------ ----------- ------------
---------- ------------ ----------- ------------
</TABLE>
F-13
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(3) INVESTMENT SECURITIES (CONTINUED)
There are no significant concentrations of investments at December 31, 1996
(greater than 10 percent of stockholders' equity) in any individual security
issuer, except for U.S. Government or agency-backed securities.
At December 31, 1996 and 1995, $18,148 and $15,028, respectively, of
variable rate securities are included in investment securities.
Investment securities with amortized cost of $263,459 and $182,976 at
December 31, 1996 and 1995, respectively, were pledged to secure public
deposits, securities sold under repurchase agreements and for other purposes
required or permitted by law. The approximate market value of securities pledged
at December 31, 1996 and 1995 was $263,608 and $182,970, respectively. All
securities sold under repurchase agreements are with customers and generally
mature on the next banking day. The Company retains possession of the underlying
securities sold under repurchase agreements.
(4) LOANS
Major categories and balances of loans included in the loan portfolios are
as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1996 1995
------------ ---------
<S> <C> <C>
Agricultural(1)...................................................... $ 143,572 113,827
Commercial(2)........................................................ 471,458 311,982
Real estate.......................................................... 274,141 142,097
Consumer(3).......................................................... 484,865 300,711
Other loans, including overdrafts.................................... 1,443 1,761
------------ ---------
Total loans.......................................................... $ 1,375,479 870,378
------------ ---------
------------ ---------
</TABLE>
- ------------------------
(1) Includes loans to agricultural customers secured by real estate of $52,689
and $43,826 at December 31, 1996 and 1995, respectively.
(2) Includes loans secured by commercial real estate properties of $198,570 and
$145,380 at December 31, 1996 and 1995, respectively.
(3) Includes loans secured by second mortgages on real estate of $74,607 and
$53,046 at December 31, 1996 and 1995, respectively.
At December 31, 1996, the Company had no concentrations of loans which
exceeded 10% of total loans other than the categories disclosed above. The
Company has no loans or loan commitments to highly leveraged companies.
Nonaccrual loans amounted to $6,822 and $3,632 at December 31, 1996 and
1995, respectively. If interest on nonaccrual loans had been accrued, such
income would have approximated $405 and $318, respectively. Loans contractually
past due ninety days or more aggregating $6,432 on December 31, 1996 and $1,711
on December 31, 1995 were on accrual status. Such loans are deemed adequately
secured and in the process of collection.
F-14
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(4) LOANS (CONTINUED)
Included in the nonaccrual loans at December 31, 1996 and 1995 are $5,122
and $3,231, respectively, of loans which are considered impaired. Of this
amount, an impairment allowance of $436 and $407, respectively, is included in
the Company's allowance for loan losses. The average recorded investment in
impaired loans for the years ended December 31, 1996 and 1995 was approximately
$3,870 and $3,080, respectively. If interest on impaired loans had been accrued,
the amount of interest income on impaired loans during 1996 and 1995 would have
been approximately $357 and $283, respectively.
Also included in total loans at December 31, 1996 and 1995 are loans with a
carrying value of $1,763 and $1,755, respectively, the terms of which have been
modified in troubled debt restructurings. There were no nonaccrual loans
included in restructured debt at December 31, 1996. Restructured debt includes
nonaccrual loans of $15 at December 31, 1995. During the years then ended, the
recognized interest income on restructured loans approximated $158 and $161,
respectively. At December 31, 1996, there were no commitments to lend additional
funds to borrowers whose existing loans have been restructured or are classified
as nonaccrual.
Most of the Company's business activity is with customers within the state
of Montana and Wyoming. Loans where the customers or related collateral are out
of the Company's trade area are not significant and management's anticipated
credit losses arising from these transactions compare favorably with the
Company's credit loss experience on its loan portfolio as a whole.
Certain executive officers and directors of the Company and certain
corporations and individuals related to such persons, incurred indebtedness in
the form of loans, as customers, of approximately $11,474 at December 31, 1996
and $12,802 at December 31, 1995 (including outstanding loans of new executive
officers and directors in 1996). During 1996, new loans and advances on existing
loans of $2,700 were funded and repayments totaled $4,028. These loans were made
on substantially the same terms, including interest rates and collateral, as
those prevailing at the time for comparable risk of collectibility.
(5) ALLOWANCE FOR LOAN LOSSES
A summary of changes in the allowance for loan losses follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year.................................... $ 15,171 13,726 13,373
Allowance of acquired banks..................................... 10,553 917 --
Provision charged to operating expense.......................... 3,844 1,629 1,344
Less loans charged-off.......................................... (3,758) (2,117) (1,880)
Add back recoveries of loans previously charged-off............. 1,987 1,016 889
--------- --------- ---------
Balance at end of year.......................................... $ 27,797 15,171 13,726
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-15
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(6) PREMISES AND EQUIPMENT
Premises and equipment and related accumulated depreciation are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Land..................................................................... $ 8,350 5,747
Buildings and improvements............................................... 53,609 33,032
Furniture and equipment.................................................. 24,689 20,406
--------- ---------
86,648 59,185
Less accumulated depreciation............................................ 28,465 26,645
--------- ---------
Premises and equipment, net.............................................. $ 58,183 32,540
--------- ---------
--------- ---------
</TABLE>
The Parent Company and a branch office lease premises from an affiliated
partnership (see note 13).
(7) OTHER REAL ESTATE OWNED
Other real estate owned (OREO) consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Other real estate.......................................................... $ 2,057 1,903
Less allowance for OREO losses............................................. 511 554
--------- ---------
$ 1,546 1,349
--------- ---------
--------- ---------
</TABLE>
A summary of transactions in the allowance for OREO losses follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Balance at beginning of year....................................... $ 554 1,048 1,448
Provision (reversal) during the year............................... (21) (28) 10
Property writedowns................................................ (16) (449) (410)
Losses on sales.................................................... (6) (17) --
--------- --------- ---------
Balance at end of year............................................. $ 511 554 1,048
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-16
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(7) OTHER REAL ESTATE OWNED (CONTINUED)
The changes in the balance of other real estate for the years ending
December 31, 1996 and 1995 are summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1995
-------------------- --------------------
<S> <C> <C> <C> <C>
Balance, beginning of year............................... $ 1,903 2,851
Add other real estate of banks acquired.................. 294 --
Add transfers from loans................................. 668 227
Cash proceeds from sales................................. $ 1,121 1,236
Less gains on sales...................................... 335 527
--------- --------- --------- ---------
Net basis of OREO sold................................... (786) (709)
Property writedowns...................................... (22) (466)
--------- ---------
Balance, end of year..................................... $ 2,057 1,903
--------- ---------
--------- ---------
</TABLE>
(8) CASH SURRENDER VALUE OF LIFE INSURANCE
The Company maintains key-executive life insurance policies on certain
principal shareholders. Under the key-executive insurance, the Company receives
the cash surrender value if the policy is terminated, or receives all benefits
payable upon the death of the insured. The aggregate face amount of
key-executive insurance policies was $7,000 at December 31, 1996. Cash surrender
values are recorded net of outstanding policy loans, since the Company has no
current plans for repayment. Outstanding policy loans at December 31, 1996 and
1995 are $2,540 and $1,875, respectively. The net cash surrender value of key-
executive insurance policies included in other assets is $278 and $792 at
December 31, 1996 and 1995, respectively.
During 1994, the Company provided insurance contracts for certain key
officers. The net cash surrender value of these contracts is $1,365 and $1,218
at December 31, 1996 and 1995, respectively, and is included in other assets.
Upon retirement, the officers have the option of entering into a split-dollar
contract with the Company providing insurance coverage for the difference
between the Company's cash surrender value and the face amount of the policy.
(9) DEPOSITS
Deposits are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------
1996 1995
------------ ----------
<S> <C> <C>
Noninterest bearing demand......................................... $ 385,371 230,136
Interest bearing:
Demand........................................................... 316,964 180,742
Savings.......................................................... 396,845 263,062
Time, $100 and over.............................................. 122,242 90,257
Time, other...................................................... 458,002 334,872
------------ ----------
Total interest bearing........................................... 1,294,053 868,933
------------ ----------
$ 1,679,424 1,099,069
------------ ----------
------------ ----------
</TABLE>
F-17
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(9) DEPOSITS (CONTINUED)
Maturities of time deposits of $100 or more are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1996
------------
<S> <C>
Three months or less............................................................ $ 40,819
Three through six months........................................................ 24,792
Six months through twelve months................................................ 43,839
Over twelve months.............................................................. 12,792
------------
$ 122,242
------------
------------
</TABLE>
Interest expense on time deposits of $100 or more was $5,514, $4,581 and
$2,846 for the years ended December 31, 1996, 1995 and 1994, respectively.
(10) INCOME TAXES
Income tax expense (benefit) consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Current:
Federal....................................................... $ 12,004 9,194 8,318
State......................................................... 1,875 1,521 1,311
--------- --------- ---------
13,879 10,715 9,629
--------- --------- ---------
Deferred:
Federal....................................................... (492) 134 214
State......................................................... (36) (5) 18
--------- --------- ---------
(528) 129 232
--------- --------- ---------
$ 13,351 10,844 9,861
--------- --------- ---------
--------- --------- ---------
</TABLE>
Total income tax expense differs from the amount computed by applying the
Federal income tax rate of 35 percent in 1996, 1995 and 1994 to income before
income taxes as a result of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Tax expense at the statutory tax rate........................... $ 12,108 9,863 8,958
Increase (decrease) in tax resulting from:
Tax-exempt income............................................. (472) (374) (116)
State income tax, net of Federal income tax benefit........... 1,190 985 864
Amortization of nondeductible Goodwill........................ 318 289 137
Other, net.................................................... 207 81 18
--------- --------- ---------
$ 13,351 10,844 9,861
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-18
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(10) INCOME TAXES (CONTINUED)
The tax effects of temporary differences between the financial statement
carrying amounts and tax bases of assets and liabilities that give rise to
significant portions of the net deferred tax asset relate to the following:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Deferred tax assets:
Loans, principally due to allowance for loan losses.................... $ 6,561 5,616
Other real estate owned, principally due to differences in bases....... 118 499
Employee benefits...................................................... 828 845
Other.................................................................. 45 --
--------- ---------
Net deferred tax assets.............................................. 7,552 6,960
Deferred tax liabilities:
Fixed assets, principally differences in bases and depreciation........ (926) (830)
Investment in joint venture partnership, principally due to differences
in depreciation of partnership assets................................ (904) (845)
Prepaid amounts........................................................ (138) (299)
Investment securities, principally differences in bases................ (370) (146)
Investment securities available-for-sale............................... (293) (254)
Other.................................................................. -- (154)
--------- ---------
Net deferred tax liabilities............................................. (2,631) (2,528)
--------- ---------
Net deferred income tax asset............................................ $ 4,921 4,432
--------- ---------
--------- ---------
</TABLE>
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the existence of, or generation of, taxable income in the periods
which those temporary differences are deductible. Management considers the
scheduled reversal of deferred tax liabilities, taxes paid in carryback years,
projected future taxable income, and tax planning strategies in making this
assessment. Based upon the level of historical taxable income and projections
for future taxable income over the periods which the deferred tax assets are
deductible, at December 31, 1996 management continues to believe it is more
likely than not that the Company will realize the benefits of these deductible
differences.
F-19
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(11) LONG-TERM DEBT AND OTHER BORROWED FUNDS
A summary of long-term debt follows:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Parent Company:
Revolving term loan due December 31, 2003 at variable interest rates (7.53% weighted
average rate at December 31, 1996), with semi-annual reductions in overall credit line of
$2,000 each June 30 and December 31...................................................... $ 39,200 --
7.5% subordinated notes, unsecured, interest payable semi-annually, due in increasing
annual principal payments beginning October 1, 2002 in the amount of $3,400 with final
maturity on October 1, 2006.............................................................. 20,000 --
Various unsecured notes payable to former stockholders at various rates of 5.80% to 8.25%
due in annual installments aggregating $486, plus interest, through March 1999........... 1,196 1,117
Term notes payable to bank, refinanced in 1996............................................. -- 9,750
Subsidiaries:
Various notes payable to Federal Home Loan Bank of Seattle, interest due monthly at various
rates and maturities (weighted average rate of 6.52% at December 31, 1996)............... 4,271 --
Note payable to Federal Home Loan Bank of Seattle repaid in 1996........................... -- 5,000
--------- ---------
$ 64,667 15,867
--------- ---------
--------- ---------
</TABLE>
Maturities of long-term debt for the years ending December 31 follow:
<TABLE>
<S> <C>
1997............................................................... $ 1,686
1998............................................................... 4,419
1999............................................................... 4,642
2000............................................................... 4,096
2001............................................................... 4,000
Thereafter......................................................... 45,824
---------
$ 64,667
---------
---------
</TABLE>
The proceeds from issuance of the revolving term note, subordinated notes
and preferred stock (see note 15) were utilized to fund acquisitions (see note
18).
In connection with its borrowings, the Company has agreed to certain
restrictions dealing with, among other things, minimum capital ratios, the sale
or issuance of capital stock and the maximum amount of dividends.
F-20
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(11) LONG-TERM DEBT AND OTHER BORROWED FUNDS (CONTINUED)
The Company has a revolving term loan with its primary lender in the amount
of $42,000 at December 31, 1996. The available borrowing amount is reduced by
$2,000 on a semi-annual basis commencing in June 1997. The revolving facility
requires an annual commitment fee of 0.15% on the unadvanced amount. The Company
may elect at various dates either prime or a Eurodollar rate plus 1.75%. The
term note payable is secured by 100% of the outstanding capital stock of the
Company's bank subsidiaries.
The notes payable to Federal Home Loan Bank of Seattle (FHLB) are secured by
FHLB stock, unencumbered residential real estate mortgages and certain
mortgage-backed securities.
The following is a summary of other borrowed funds, all of which mature
within one year:
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
--------- ---------
<S> <C> <C>
Interest bearing demand notes issued to the United States Treasury, secured by investment
securities................................................................................... $ 11,071 5,494
5.45% interest bearing demand note issued to Federal Home Loan Bank of Seattle secured by
unencumbered real estate mortgages and certain mortgages and certain mortgage-backed
securities................................................................................... 2,000 --
--------- ---------
$ 13,071 5,494
--------- ---------
--------- ---------
</TABLE>
The Company has Federal funds lines of credit with third parties amounting
to $50,000, subject to funds availability. The Company also has been approved
for participation in the Federal Home Loan Bank Cash management Advance Program
for borrowings up to approximately $39,500.
(12) EMPLOYEE BENEFIT PLANS
PROFIT SHARING PLAN. The Company has a noncontributory profit sharing plan.
To be eligible for the profit sharing plan, an employee must complete one year
of employment and 1,000 hours or more of service. Quarterly contributions are
determined by the Company's Board of Directors, but are not to exceed, on an
individual basis, the lesser of 25% of compensation or $30. Contributions to
this plan were $839, $685 and $620 in 1996, 1995 and 1994, respectively.
SAVINGS PLAN. In addition, the Company has a contributory employee savings
plan. Eligibility requirements for this plan are the same as those for the
profit sharing plan as discussed in the preceding paragraph. Employee
participation in the plan is at the option of the employee. The Company
contributes $1.25 for each $1.00 of employee contributions up to 4% of the
participating employee's compensation. The recorded expense related to this plan
was $814 in 1996, $703 in 1995 and $648 in 1994.
STOCK OPTION PLAN. The Company has a Nonqualified Stock Option and Stock
Appreciation Rights Plan for senior officers of the Company. All options and
stock appreciation rights ("SAR's") granted have an exercise price of book value
of the Company prior to 1993 and appraised value thereafter. Each option granted
under the Plan can be immediately exercised up to ten years from the date of
grant. SAR's are granted and exercised in tandem with options. The stock issued
in conjunction with the exercise of options
F-21
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(12) EMPLOYEE BENEFIT PLANS (CONTINUED)
is subject to a shareholder agreement (see note 15). The consolidated expense
related to this plan was $72 in 1996, $170 in 1995 and $387 in 1994.
Information with respect to the Company's stock options and SAR's are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
OPTIONS SAR'S OPTIONS SAR'S OPTIONS SAR'S
--------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Outstanding, beginning of year................... 116,752 79,236 120,464 82,140 128,536 93,320
Granted.......................................... 16,600 16,600 16,500 16,500 15,400 11,552
Exercised........................................ (17,516) (17,516) (20,212) (19,404) (23,472) (22,732)
--------- --------- --------- --------- --------- ---------
Outstanding, end of year......................... 115,836 78,320 116,752 79,236 120,464 82,140
--------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
Information with respect to the range of stock option exercise prices are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------
1996 1995 1994
----------------- ----------------- -----------------
<S> <C> <C> <C>
Granted during year...................................... $ 17.86 - $17.86 $ 15.80 - $15.80 $ 12.40 - $12.40
Exercised during year.................................... $ 4.30 - $ 6.16 $ 4.30 - $ 5.88 $ 4.05 - $ 5.36
Outstanding, end of year................................. $ 4.56 - $17.86 $ 4.30 - $15.80 $ 4.30 - $12.40
</TABLE>
Stratification and additional detail regarding the options outstanding at
December 31, 1996 are as follows (all exercisable):
<TABLE>
<CAPTION>
EXERCISE NUMBER WEIGHTED-AVERAGE WEIGHTED-AVERAGE
PRICE RANGE OUTSTANDING REMAINING LIFE EXERCISE PRICE
- ----------------- ----------- ---------------- -----------------
<S> <C> <C> <C>
$4.56 - $7.61 50,936 2.97 years $ 6.13
$11.40 - $17.86 64,900 7.73 years 14.41
</TABLE>
The Company has elected to continue to measure compensation costs as
prescribed by APB Opinion No. 25 and, accordingly, does not recognize
compensation expense on the options granted where the exercise price is equal to
appraisal value at the date of grant. SFAS No. 123 requires the Company to
disclose pro forma information reflecting net income and earnings per share had
the Company elected to record compensation expense based on the fair value
method described in SFAS No. 123. The fair value of the options was estimated at
the grant date using a Black-Scholes option pricing model. Option valuation
models require the input of highly subjective assumptions. Because the Company's
common stock and stock options have characteristics significantly different from
listed securities and traded options, and because changes in the subjective
input assumptions can materially affect the fair value estimate, in management's
opinion, the existing models do not necessarily provide a reliable single
measure of the fair value of its stock options.
The following weighted-average assumptions were used in the valuation model:
risk-free interest rates of 5.65% and 7.78% in 1996 and 1995; dividend yield of
2.50% and 2.67% in 1996 and 1995; and expected life of options of 10 years in
both 1996 and 1995.
F-22
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(12) EMPLOYEE BENEFIT PLANS (CONTINUED)
Pro forma disclosures, listed below, include options granted in 1996 and
1995 and are not likely to be representative of the pro forma disclosures for
future years. The estimated fair value of the options is expensed in the year
granted as all options are vested upon grant.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996 1995
- --------------------------------------------------------------------------------------------- --------- ---------
<S> <C> <C>
Pro forma net income......................................................................... $ 21,102 17,211
Pro forma net income applicable to common stock.............................................. 20,677 17,211
Pro forma earnings per common share.......................................................... 2.62 2.19
--------- ---------
--------- ---------
</TABLE>
(13) COMMITMENTS AND CONTINGENCIES
In the normal course of business, the Company is involved in various claims
and litigation. In the opinion of management, following consultation with legal
counsel, the ultimate liability or disposition thereof will not have a material
adverse effect on the consolidated financial condition or results of operations.
The Parent Company and the Billings office of FIB Montana are the anchor
tenants in a building owned by a joint venture partnership in which FIB Montana
is one of the two partners, and has a 50% partnership interest. The investment
in the partnership is accounted for using the equity method. Indebtedness of the
partnership in the amount of $10,827 at December 31, 1996 is recourse to the
partners. Total rents paid to the partnership were $814 in 1996, $711 in 1995
and $690 in 1994.
The Company also leases certain premises and equipment from third parties
under operating leases. Total rental expense to third parties was $1,019 in
1996, $1,425 in 1995 and $1,267 in 1994.
The total future minimum rental commitments required under operating leases
that have initial or remaining noncancellable lease terms in excess of one year
at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
THIRD
PARTIES PARTNERSHIP TOTAL
--------- ------------- ---------
<S> <C> <C> <C>
For the year ending December 31:
1997......................................................... $ 328 814 1,142
1998......................................................... 273 814 1,087
1999......................................................... 268 814 1,082
2000......................................................... 196 814 1,010
2001......................................................... 171 814 985
Thereafter................................................... 1,476 3,053 4,529
--------- ----- ---------
$ 2,712 7,123 9,835
--------- ----- ---------
--------- ----- ---------
</TABLE>
In September 1983, the Company entered into a franchise agreement
("Franchise Agreement") with First Interstate Bancorp (Bancorp), a Los Angeles
based bank holding company which was acquired by Wells Fargo & Company April 1,
1996. Under the Franchise Agreement, the Company was Bancorp's exclusive
licensee in the states of Montana and Wyoming. On May 24, 1996, the Company
entered into a trademark license agreement granting the Company and its
subsidiaries an exclusive, nontransferable license to use the "First Interstate"
name and logo in the states of Montana, Wyoming, North Dakota,
F-23
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(13) COMMITMENTS AND CONTINGENCIES (CONTINUED)
South Dakota and Nebraska. By mutual agreement of the parties, the franchise
agreement between the Company and Wells Fargo & Company was terminated.
(14) FINANCIAL INSTRUMENTS WITH OFF-BALANCE-SHEET RISK
The Company is a party to financial instruments with off-balance-sheet risk
in the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve, to varying degrees, elements of
credit and interest rate risk in excess of amounts recorded in the consolidated
balance sheet.
Standby letters of credit and financial guarantees written are conditional
commitments issued by the Company to guarantee the performance of a customer to
a third party. Most commitments extend less than two years. The credit risk
involved in issuing letters of credit is essentially the same as that involved
in extending loan facilities to customers. The Company holds various collateral
supporting those commitments for which collateral is deemed necessary.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected to
expire without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements. The Company evaluates each customer's
creditworthiness on a case-by-case basis. The amount of collateral obtained is
based on management's credit evaluation of the customer. Collateral held varies
but may include accounts receivable, inventory, property, plant and equipment,
and income-producing commercial properties.
The Company's exposure to credit loss in the event of nonperformance by the
other party to the financial instrument for commitments to extend credit and
standby letters of credit is represented by the contractual amount of those
instruments. At December 31, 1996, stand-by letters of credit in the amount of
$19,884, were outstanding. Commitments to extend credit to existing and new
borrowers approximated $284,259 at December 31, 1996, which includes $32,760 on
unused credit card lines.
(15) CAPITAL STOCK
On September 26, 1996 ("Issuance Date"), the Company issued 20,000 shares of
no par noncumulative perpetual preferred stock ("Preferred Stock") at a price of
$1,000. The holders of Preferred Stock are entitled to receive in any fiscal
year, when and if declared by the Company's Board of Directors, dividends in
cash at the rate of $85.30 per share, up to the seventh anniversary of the
Issuance Date. From and after the seventh anniversary of the Issuance Date, the
holders of Preferred Stock shall be entitled to receive in any fiscal year, when
and if declared by the Company's Board of Directors, dividends in cash at a
variable rate equal to 250 basis points over the high yield of the 30-day,
10-year or 30-year U.S. Treasury Bills. The Preferred Stock is not redeemable
prior to the seventh anniversary of the Issuance Date. The Company may, at its
option, redeem all or any part of the Preferred Stock at any time on or after
the seventh anniversary of the Issuance Date, subject to the approval of the
FRB, at a price of $1.00 per share, plus accrued but unpaid dividends to the
date fixed for redemption.
At December 31, 1996 nearly all shares of common stock held by shareholders
are subject to shareholder's agreements (Agreements). Under the Agreements, the
Company has a right of first refusal
F-24
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(15) CAPITAL STOCK (CONTINUED)
to repurchase shares from the shareholder at minority interest appraised value
in the event of a proposed sale of shares to a third party, death, disability or
termination of employment. Additional shares purchased by officers, directors
and employees after 1993 are also subject to repurchase at the Company's
discretion.
(16) CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY)
Following is condensed financial information of First Interstate BancSystem,
Inc.:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1995
---------- ----------
<S> <C> <C>
CONDENSED BALANCE SHEETS:
Assets:
Cash and cash equivalents............................................................... $ 2,905 1,890
Investment in subsidiaries, at equity:
FIB Montana........................................................................... 88,438 85,951
FIB Wyoming........................................................................... 29,196 28,145
First Interstate Bank of Montana, N.A.(1)............................................. 35,052 --
First Interstate Bank of Wyoming, N.A.(1)............................................. 38,909 --
Mountain Bank of Whitefish (doing business as First Interstate Bank)(1)............... 7,965 --
First Interstate Bank, fsb............................................................ 1,988 --
Non-bank subsidiary--Commerce Financial, Inc.......................................... 408 381
---------- ----------
Total investment in subsidiaries, at equity....................................... 201,956 114,477
Goodwill, net of accumulated amortization............................................... 2,633 2,927
Other assets............................................................................ 4,068 4,009
---------- ----------
$ 211,562 123,303
---------- ----------
---------- ----------
Liabilities and stockholders' equity:
Other liabilities....................................................................... $ 5,105 3,070
Long-term debt.......................................................................... 60,396 10,867
---------- ----------
65,501 13,937
Stockholders' equity.................................................................... 145,554 108,973
Unrealized gain on investment securities available-for-sale, net........................ 507 393
---------- ----------
$ 211,562 123,303
---------- ----------
---------- ----------
</TABLE>
- ------------------------
(1) See Note 18 for further information regarding this entity.
F-25
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(16) CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
CONDENSED STATEMENTS OF INCOME:
Dividends from subsidiary banks................................................ $ 19,529 10,993 10,029
Interest on note receivable from non-bank subsidiary........................... 15 32 41
Other interest income.......................................................... 143 30 159
Other income, primarily management fees from subsidiaries...................... 1,788 1,508 1,513
--------- --------- ---------
Total income................................................................... 21,475 12,563 11,742
--------- --------- ---------
Salaries and benefits.......................................................... 2,627 2,370 2,378
Interest expense............................................................... 1,919 1,010 514
Other operating expenses, net.................................................. 2,612 1,835 1,506
--------- --------- ---------
Total expenses................................................................. 7,158 5,215 4,398
--------- --------- ---------
Data Division income, net of operating expenses................................ 1,990 1,667 1,307
--------- --------- ---------
Earnings before income tax benefits............................................ 16,307 9,015 8,651
Income tax benefit............................................................. 979 565 343
--------- --------- ---------
Income before undistributed earnings of subsidiaries........................... 17,286 9,580 8,994
--------- --------- ---------
Undistributed earnings of subsidiaries......................................... 3,957 7,757 6,740
--------- --------- ---------
Net income..................................................................... $ 21,243 17,337 15,734
--------- --------- ---------
--------- --------- ---------
CONDENSED STATEMENTS OF CASH FLOWS:
Cash flows from operating activities:
Net income................................................................... $ 21,243 17,337 15,734
Adjustments to reconcile net income to cash provided by operating activities:
Undistributed earnings of subsidiaries..................................... (3,957) (7,757) (6,740)
Depreciation and amortization.............................................. 311 312 306
Provision for deferred income taxes........................................ 11 348 177
Deposit on bank acquisition................................................ -- 250 (250)
Other, net................................................................. 802 967 (1,432)
--------- --------- ---------
Net cash provided by operating activities...................................... 18,410 11,457 7,795
--------- --------- ---------
Cash flows from investing activities:
Net decrease in advances to non-bank subsidiary.............................. 133 154 1,040
Purchase of investments...................................................... -- -- (8,959)
Maturities of investments.................................................... -- 7,500 2,512
Increase in premises and equipment........................................... (2) (1,095) (28)
Capitalization of de novo subsidiary......................................... (2,000) -- --
Acquisitions of subsidiaries, net............................................ (80,393) (17,478) --
--------- --------- ---------
Net cash used in investing activities.......................................... (82,262) (10,919) (5,435)
--------- --------- ---------
</TABLE>
F-26
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(16) CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- --------- ---------
<S> <C> <C> <C>
Cash flows from financing activities:
Borrowings of long-term debt................................................. $ 66,939 8,484 122
Repayments of long-term debt................................................. (17,410) (3,066) (1,526)
Dividends paid on common stock............................................... (6,028) (3,733) (3,101)
Redemptions of common stock.................................................. (1,229) (1,197) (950)
Issuance of common stock..................................................... 3,478 358 362
Proceeds from issuance of preferred stock, net of issuance costs............. 19,542 -- --
Dividends paid on preferred stock............................................ (425) -- --
--------- --------- ---------
Net cash provided by (used in) financing activities............................ 64,867 846 (5,093)
--------- --------- ---------
Net increase (decrease) in cash and cash equivalents........................... 1,015 1,384 (2,733)
Cash and cash equivalents, beginning of year................................... 1,890 506 3,239
--------- --------- ---------
Cash and cash equivalents, end of year......................................... $ 2,905 1,890 506
--------- --------- ---------
--------- --------- ---------
</TABLE>
NONCASH OPERATING, INVESTING AND FINANCING ACTIVITIES.
During 1996, the Parent Company transferred other assets of $1,014 to its
subsidiary, FIB Montana.
(17) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, DISCLOSURES ABOUT FAIR
VALUE OF FINANCIAL INSTRUMENTS (Statement 107), requires the Company to disclose
the estimated fair values of its financial instruments. Most of the Company's
assets and liabilities are considered financial instruments. Many of the
Company's financial instruments lack an available trading market, and it is the
practice and intent of the Company to hold its financial instruments to
maturity. As a result, significant assumptions and present value calculations
were used in determining estimated fair values.
For financial instruments bearing a variable interest rate, it is presumed
that recorded book values are reasonable estimates of fair value. The methods
and significant assumptions used to estimate fair values for the various
financial instruments are set forth below.
CASH AND CASH EQUIVALENTS. Due to the liquid nature of the instruments,
the carrying value of due from banks and federal funds sold approximates
market value.
INTEREST-BEARING DEPOSITS IN BANK. Due to the short-term nature of the
instrument, the carrying value of the interest-bearing deposit in bank
approximates market value.
INVESTMENT SECURITIES. Fair values of investment securities are based
on quoted market prices or dealer quotes. If a quoted market price is not
available, fair value is estimated using quoted market prices for similar
securities.
LOANS. Fair values are estimated for portfolios of loans with similar
financial characteristics. Loans are segregated by type such as commercial,
real estate, and consumer. Each loan category is
F-27
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(17) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
further segmented into fixed and adjustable rate interest terms and by
performing and nonperforming categories.
The fair value of performing fixed rate loans is calculated by discounting
scheduled cash flows through estimated maturity using estimated market discount
rates that reflect the credit and interest rate risk inherent in the loan
category using the U.S. Treasury yield curve adjusted to bond equivalent yields.
The estimate of maturity is based on the Company's historical experience with
repayments for each loan classification, modified, as required, by an estimate
of the effect of current economic and lending conditions. For performing real
estate loans, fair value is estimated by discounting contractual cash flows
adjusted for prepayment estimates using discount rates based on secondary market
sources.
The fair value of adjustable rate loans was considered to be the carrying
value of these instruments due to the frequent repricing, provided there had
been no change in credit quality since origination.
DEPOSITS, FEDERAL FUNDS PURCHASED AND SECURITIES SOLD UNDER REPURCHASE
AGREEMENTS. The fair value of demand deposits, savings accounts, federal funds
purchased and securities sold under repurchase agreements is the amount payable
on demand at the reporting date, due to the liquid nature of the instruments and
the frequent repricing.
The fair value of fixed-maturity certificates of deposit is estimated using
external market rates currently offered for deposits with similar remaining
maturities.
OTHER BORROWED FUNDS AND LONG-TERM DEBT. The term note payable and
revolving term loan bear interest at a floating market rate and, as such, the
carrying amounts are deemed to reflect fair value. The carrying value of the
interest bearing demand notes to the United States Treasury is deemed an
approximation of fair value due to the frequent repayment and repricing at
market rates. Due to the recent issuance date of the subordinated notes and
relative stability of interest rates in the intervening period, book value is
estimated to approximate fair value.
COMMITMENTS TO EXTEND CREDIT AND STANDBY LETTERS OF CREDIT. The fair value
of commitments to extend credit can be estimated using the fees currently
charged to enter into similar agreements, taking into account the remaining
terms of the agreements and the present creditworthiness of the counterparties.
It is not practicable to estimate fair value because information is not readily
available to support estimates of fees which can be expected to be realized on
these instruments.
Loan fees for the year ended December 31, 1996 and 1995, including fees
charged for commitments to extend credit and standby letters of credit, were
approximately $4,981 and $4,070, respectively, of which a significant portion
related to real estate refinancing.
LIMITATIONS. Fair value estimates are made at a specific point in time,
based on relevant market information and information about the financial
instrument. These estimates do not reflect any premium or discount that could
result from offering for sale at one time the entire holdings of a particular
instrument. Because no market exists for a significant portion of the financial
instruments, fair value estimates are based on judgments regarding comparable
market interest rates, future expected loss experience, current economic
conditions, risk characteristics of various financial instruments, and other
factors. These estimates are subjective in nature and involve uncertainties and
matters of significant
F-28
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(17) DISCLOSURE ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
judgment and therefore cannot be determined with precision. Changes in
assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet
financial instruments without attempting to estimate the value of anticipated
future business and the value of assets and liabilities that are not considered
financial instruments. For example, the Company has a trust department and data
processing division that contribute net operating income annually. Neither
department is considered a financial instrument, and their value has not been
incorporated into the fair value estimates. Other significant assets that are
not considered financial instruments include the mortgage subsidiary, deferred
tax assets, and property and equipment. In addition, the tax effect of the
difference between the fair value and carrying value of financial instruments
can have a significant effect on fair value estimates and have not been
considered in the estimates.
A summary of the estimated fair values of financial instruments follows:
<TABLE>
<CAPTION>
1996 1995
-------------------------- --------------------------
CARRYING ESTIMATED CARRYING ESTIMATED
AS OF DECEMBER 31, AMOUNT FAIR VALUE AMOUNT FAIR VALUE
- --------------------------------------------------------- ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Financial assets:
Cash and short-term investments........................ $ 172,452 172,452 166,082 166,082
Securities available-for-sale.......................... 124,502 124,502 65,790 65,790
Securities held-to-maturity............................ 279,069 278,876 192,947 193,037
Net loans.............................................. 1,347,682 1,344,336 855,207 863,480
------------ ------------ ------------ ------------
Total financial assets................................... $ 1,923,705 1,920,166 1,280,026 1,288,389
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Financial liabilities:
Total deposits, excluding certificates................. $ 1,099,180 1,099,180 673,940 673,940
Certificates of deposit................................ 580,244 587,718 425,129 434,190
Federal funds purchased................................ 13,450 13,450 3,125 3,125
Securities sold under repurchase agreements............ 129,137 129,137 104,898 104,898
Other borrowed funds................................... 13,071 13,071 5,494 5,494
Long-term debt......................................... 64,667 64,667 15,867 15,867
------------ ------------ ------------ ------------
Total financial liabilities.............................. $ 1,899,749 1,907,223 1,228,453 1,237,514
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
(18) ACQUISITIONS AND EXPANSION
FIRST CITIZENS BANK OF BOZEMAN. On January 3, 1995, the Company acquired
all of the outstanding ownership of Citizens BancShares, Inc. ("CBI") and its
bank subsidiary, First Citizens Bank of Bozeman ("FCB") for $8,606. The
historical carrying value of the net assets of CBI as of the acquisition date
were $3,724. The transaction was accounted for as a purchase and, accordingly,
the consolidated statement of income for the year ended December 31, 1995
includes CBI's results of operations since the date of the purchase. CBI was
subsequently dissolved and FCB became a branch of FIB Montana.
FIRST NATIONAL PARK BANK. On May 19, 1995, the Company acquired all of the
outstanding ownership of First Park County Bancshares, Inc. ("FPCBI") and its
bank subsidiary, First National Park Bank
F-29
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(18) ACQUISITIONS AND EXPANSION (CONTINUED)
("FNPB") for $8,872. The historical carrying value of the net assets of FPCBI as
of the acquisition date were $5,269. The transaction was accounted for as a
purchase and, accordingly, the consolidated statement of income for the year
ended December 31, 1995 includes FPCBI's results of operations since the date of
the purchase. FPCBI was subsequently dissolved and FNPB became a branch of FIB
Montana.
FIRST INTERSTATE BANK, FSB. In November 1995, the Company filed an
application with the Office of Thrift Supervision for permission to form a de
novo savings bank in Hamilton, Montana. Upon approval, the Company capitalized
the savings bank at $2,000 and opened the bank on December 12, 1996.
FIRST INTERSTATE BANK OF MONTANA, N.A. AND FIRST INTERSTATE BANK OF WYOMING,
N.A. On October 1, 1996, the Company acquired all of the outstanding ownership
of First Interstate Bank of Montana, N.A. (FIBNA-MT) and First Interstate Bank
of Wyoming, N.A. (FIBNA-WY). The transaction was accounted for as a purchase
and, accordingly, the consolidated statement of income for the year ended
December 31, 1996 includes FIBNA-MT's and FIBNA-WY's results of operations since
the date of purchase.
MOUNTAIN BANK OF WHITEFISH. On December 18, 1996, the Company acquired all
of the outstanding ownership of Mountain Bank of Whitefish, now doing business
as First Interstate Bank of Whitefish (FIB-Whitefish). The transaction was
accounted for as a purchase and, accordingly, the consolidated statement of
income for the year ended December 31, 1996 includes FIB-Whitefish's results of
operations since the date of purchase.
The premiums paid over the historical carrying value of net assets at the
respective dates of purchase were as follows:
<TABLE>
<CAPTION>
FIBNA-MT FIBNA-WY FIB-WHITEFISH TOTAL
----------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
Cash consideration paid......................................... $ 34,622 37,809 7,962 80,393
Historical net assets carrying value............................ 19,557 16,416 3,994 39,967
----------- ----------- ------ ---------
Premium paid over historical carrying value..................... $ 15,065 21,393 3,968 40,426
----------- ----------- ------ ---------
----------- ----------- ------ ---------
</TABLE>
The increase (decrease) in net asset values as a result of estimated fair
value adjustments are as follows:
<TABLE>
<CAPTION>
FIBNA-MT FIBNA-WY FIB-WHITEFISH TOTAL
----------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
Intangible assets:
Core deposit intangible....................................... $ 3,920 4,309 -- 8,229
Mortgage servicing rights..................................... -- 1,122 -- 1,122
Goodwill...................................................... 7,392 9,850 3,573 20,815
----------- ----------- ------ ---------
Total intangible assets..................................... 11,312 15,281 3,573 30,166
----------- ----------- ------ ---------
Premises and equipment.......................................... 3,780 6,327 837 10,944
Investment securities........................................... (27) -- 13 (14)
Allowance for loan losses....................................... -- -- (455) (455)
Other liabilities............................................... -- (215) -- (215)
----------- ----------- ------ ---------
$ 15,065 21,393 3,968 40,426
----------- ----------- ------ ---------
----------- ----------- ------ ---------
</TABLE>
F-30
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(18) ACQUISITIONS AND EXPANSION (CONTINUED)
The premium paid and estimated fair value adjustments have been "pushed
down" to the acquired entities. The preliminary allocation of purchase price is
subject to change as fair value estimates are finalized.
The estimated fair value of net assets at the acquisition dates are
summarized as follows:
<TABLE>
<CAPTION>
FIBNA-MT FIBNA-WY FIB-WHITEFISH TOTAL
----------- ----------- ------------- ---------
<S> <C> <C> <C> <C>
Cash and due from banks........................................ $ 20,712 24,990 4,132 49,834
Federal funds sold............................................. 16,791 32,708 5,900 55,399
Investment securities available-for-sale....................... 1,301 59,014 3,304 63,619
Investment securities held-to-maturity......................... 25,325 10,749 -- 36,074
Loans.......................................................... 191,010 172,576 47,799 411,385
Allowance for loan losses...................................... (2,983) (7,076) (494) (10,553)
Premises and equipment......................................... 8,534 11,934 3,181 23,649
Goodwill....................................................... 7,392 9,850 3,573 20,815
Other intangibles.............................................. 3,920 5,431 -- 9,351
Other assets................................................... 4,394 4,004 3,542 11,940
----------- ----------- ------------- ---------
276,396 324,180 70,937 671,513
----------- ----------- ------------- ---------
Deposits....................................................... 195,484 273,805 54,392 523,681
Federal funds purchased........................................ 41,653 8,849 -- 50,502
Other liabilities.............................................. 2,374 1,532 312 4,218
Borrowed funds................................................. 2,263 2,185 8,271 12,719
----------- ----------- ------------- ---------
241,774 286,371 62,975 591,120
----------- ----------- ------------- ---------
Cash consideration paid........................................ $ 34,622 37,809 7,962 80,393
----------- ----------- ------------- ---------
----------- ----------- ------------- ---------
</TABLE>
F-31
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(18) ACQUISITIONS AND EXPANSION (CONTINUED)
The information below presents on a pro forma basis, amounts as if FIBNA-MT,
FIBNA-WY, and FIB-Whitefish had been acquired as of January 1, 1996 and 1995 for
each year presented.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER
31,
---------------------
1996 1995
---------- ---------
(UNAUDITED)
<S> <C> <C>
Interest income............................................................................ $ 151,721 142,827
Interest expense........................................................................... 65,404 61,260
---------- ---------
Net interest income........................................................................ 86,317 81,567
Provision for loan losses.................................................................. 4,955 1,629
---------- ---------
Net interest income after provision for loan losses........................................ 81,362 79,938
Investment security transactions........................................................... 284 9
Noninterest income......................................................................... 29,988 26,982
Noninterest expense........................................................................ (71,027) (69,008)
---------- ---------
Income before income taxes................................................................. 40,607 37,921
Income taxes............................................................................... 15,836 14,387
---------- ---------
Pro forma net income....................................................................... $ 24,771 23,534
---------- ---------
---------- ---------
Pro forma net income per common share...................................................... $ 2.93 2.78
---------- ---------
---------- ---------
</TABLE>
The unaudited pro forma information above has been prepared for comparative
purposes only and does not purport to be indicative of the actual results that
would have occurred if the operations had been combined during the periods
presented nor is it intended to be a projection of future results.
(19) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
In 1996, the FASB issued SFAS No. 125, "Accounting for Transfers and
Servicing of Financial Assets and Extinguishments of Liabilities," which
provides guidance on accounting for transfers and servicing of financial assets,
recognition and measurement of servicing assets and liabilities, financial
assets subject to prepayment, secured borrowings and collateral, and
extinguishment of liabilities.
SFAS No. 125 generally requires the Company to recognize as separate assets
the rights to service mortgage loans for others, whether the servicing rights
are acquired through purchases or loan originations. Servicing rights are
initially recorded at fair value based upon the present value of estimated
future cash flows. Subsequently, the servicing rights are assessed for
impairment, with impairment losses recognized in the statement of income in the
period the impairment occurs. For purposes of performing the impairment
evaluation, the related portfolio must be stratified on the basis of certain
risk characteristics including loan type and note rate. SFAS No. 125 also
specifies that financial assets subject to prepayment, including loans that can
be contractually prepaid or otherwise settled in such a way that the holder
would not recover substantially all of its recorded investment, be measured like
debt securities available-for-sale or trading securities under SFAS No. 115. The
provisions of SFAS No. 125 apply prospectively to transactions occurring after
December 31, 1996. Management expects adoption will not have a material effect
on the consolidated financial position or results of operations of the Company.
F-32
<PAGE>
FIRST INTERSTATE BANCSYSTEM, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)
(19) ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED (CONTINUED)
At December 31, 1996, the Company serviced loans for others with a principal
balance outstanding of approximately $140,000.
(20) PLAN OF RECAPITALIZATION
Effective October 7, 1997 the Company effected a four-for-one split of the
Company's existing common stock. New stock with no par value will be issued in
exchange for existing stock with no par value presently issued and outstanding.
The authorized number of common shares were increased from 5,000,000 to
20,000,000 to accomodate the stock split. All applicable share and per share
data have been retroactively adjusted to the resulting four-for-one stock split.
Also effective October 7, 1997 the Parent Company changed its name to "First
Interstate BancSystem, Inc."
F-33
<PAGE>
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFER MADE BY THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN ANY JURISDICTION IN WHICH SUCH
OFFER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING SUCH
OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANYONE TO WHOM IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME
SUBSEQUENT TO THE DATE HEREOF.
--------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 5
Risk Factors.............................................................. 11
Use of Proceeds........................................................... 19
Accounting Treatment...................................................... 19
Capitalization............................................................ 20
Regulatory Capital Ratios................................................. 20
Selected Consolidated Financial Data...................................... 21
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 23
Business.................................................................. 42
Regulation and Supervision................................................ 47
Management................................................................ 57
Certain Related Transactions.............................................. 62
Security Ownership of Certain Beneficial Owners and Management............ 63
Description of the Trust Preferred Securities............................. 64
Description of Junior Subordinated Debentures............................. 77
Book Entry Issuance....................................................... 87
Description of Guarantee.................................................. 89
Relationship Among the Trust Preferred Securities, the Junior Subordinated
Debentures and the Guarantee............................................ 91
Certain Federal Income Tax Consequences................................... 93
Description of First Interstate Capital Stock............................. 96
Underwriting.............................................................. 99
Legal Matters............................................................. 100
Experts................................................................... 100
Additional Information.................................................... 100
Index to Consolidated Financial Statements................................ 101
</TABLE>
------------------------
UNTIL NOVEMBER 28, 1997 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
1,600,000 TRUST
PREFERRED SECURITIES
FIB CAPITAL TRUST
8 5/8% CUMULATIVE TRUST PREFERRED SECURITIES
(LIQUIDATION AMOUNT $25 PER TRUST PREFERRED SECURITY)
FULLY AND UNCONDITIONALLY GUARANTEED,
AS DESCRIBED HEREIN, BY
[LOGO]
FIRST INTERSTATE
BANCSYSTEM, INC.
---------------------
PROSPECTUS
---------------------
D.A. Davidson & Co.
NOVEMBER 3, 1997
- ------------------------------------------------
------------------------------------------------
- ------------------------------------------------
------------------------------------------------
